What to do if you owe but can’t pay (CBS.com)

From CBS.com

(MoneyWatch) So you’ve prepared your tax return and found that you owe. What should you do if you can’t pay?

One thing you should do no matter what is to file your tax return on time. But if you don’t make any arrangements to pay what you owe, the IRS is legally required to take steps to collect what you owe, which include:

  • Use your past and future refunds to offset your bill
  • File a federal tax lien against your property
  • Place a tax levy against your salary
  • Seize your financial accounts
  • Serve you with a summons to appear before the IRS to provide information as to why you cannot pay

Needless to say, there are better alternatives. For starters, consider seeking a loan. You could ask for a loan from a relative, a friend or a bank (though approval may be tough given your financial situation). You could tap a home equity line of credit, if that is available. Current interest rates on home equity credit lines are low and repayment terms are flexible.

You can also pay your taxes using a credit card. Using this option is just another form of borrowing, but it will avoid the IRS penalties for not paying at all. The downside is that you’ll pay convenience fees of about 2 percent to 4 percent of the amount charged. And if you don’t pay your credit card balance in full and on time, you could end up paying expensive interest on the balance you carry at a rate that is higher than the IRS interest rate for installment payments.

Online installment payments

If you owe less than $25,000 in combined tax, penalties and interest and you have filed all required tax returns in a timely manner, you may be eligible to complete and submit an Online Payment Agreement or OPA.

Taxpayers or their representatives can apply online and receive immediate approval. Because there may be situations when you need to speak with the IRS before they can determine your eligibility for an installment agreement, the OPA application also includes an address and a toll-free phone number to contact them.

When submitting an Online Payment Agreement, there are basically two payment options available:

60 to 120 Day Extension: if approved, you could get an extension for up to 120 days to pay. If you go this route, you’d generally pay less in penalties and interest than if using a longer term installment agreement.

Monthly Payment Plan: If you can’t pay in full within 120 days, you may be permitted to use the web-based Online Payment Agreement to apply for and receive immediate approval to make monthly installment payments. There are a few conditions. First, you must have filed all of your prior years’ tax returns and pay a user fee of $105 ($52 if payments automatically deducted from a bank account). You’ll also pay the IRS interest on the unpaid balance, which is currently an annual rate of about 3 percent.

When you request a short term extension or a payment plan, the IRS will send written confirmation so you’ll know your request has been approved.

You’ll pay penalties and interest on the taxes you owe until a payment agreement is paid off. However, depending on your individual circumstances, the IRS could offer a payment plan at a reduced interest rate. Also, as a condition of the installment agreement, any future tax refunds will be automatically applied against the amount you owe until the balance is paid off.

Since the IRS charges a user fee for setting up a payment plan, it may not be the best option for amount owed is less than $2,000 and you know you can pay it off in less than 120 days. If this is the case, then consider the other alternatives mentioned above. Also keep in mind that if you opt for a payment plan that is longer, you’ll have to pay all future taxes in full and on time.

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