April 18 is just around the corner and that is the day this year that your tax returns are due. Unfortunately, one issue that many people are going to have to deal with is the fact that they owe money to the IRS. For those who can just write a check, it won’t be a problem; however, for those who are unable to pay, there are some things that you need to consider. The most important thing to consider is that from the IRS’ standpoint, failure to file your return is as serious if not more serious, than failure to pay. Therefore, even if you cannot afford the amount of tax owed, it is in your best interest to file your return. Not only will you potentially have less penalties to pay but it will also be easier in the future for you to deal with the IRS.
If you cannot afford to write a check for your tax liability, you have a number of different options. The first is to put it on your charge card. If it’s just a timing issue and you’re going to have the money in a few weeks it may make sense to put it on a charge card that gives you a grace period. When you receive the credit card statement you can then immediately pay the bill. The one cost in doing this is that generally when you use a charge card to pay your taxes, you’re going to have to pay a service fee somewhere in the area of two percent. On the other hand, long-term financing of your tax liability by using your charge card can be very expensive.
Another option is to request a payment plan from the Internal Revenue Service. The government has a variety of programs that may fit your situation. For those of you in need of an extension to pay for a short period of time, you can complete an online payment agreement with the Internal Revenue Service on their website and receive an extra 60 to 120 days.
Another option for those who need an extension longer than 120 days is to apply for an installment agreement request, form 9465. Under this program you can stretch out payments to the IRS for up to three years. The one downside of the program is the fact that it can take up to 30 days for the IRS to approve your installment plan. However, if you can’t afford the taxes, it still makes sense to file your return, pay what you can and then wait and see if they approve your installment agreement or not.
The IRS also has Form 1127 which can be used for a hardship extension. Unfortunately, it is not easy to qualify for a hardship extension.
None of us like filing our tax returns; however, it’s our responsibility as citizens. Therefore, by April 18 we should have all filed our returns or at least have filed for an extension. Even for those who owe money to the government but cannot afford to pay, it is much better for them to file the return without payment than to choose to not file. Dealing with the IRS is not fun. However, what can make dealing with the IRS even less enjoyable is if you do not file your return. Therefore, my advice to everyone is to make sure you do something before the April 18 deadline.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com.