You owe money to the IRS—but you just don’t have it. This will probably get you into trouble, but what choice do you have? Maybe they won’t notice yours is missing.
...Bad idea. It might take the IRS a while to get back to you about your missing return, but you'll be in big trouble once they do. Whereas, if you deal with the issue right away, you'll be in much better shape.
So, pull your head out from under the covers and take these simple steps to minimize the consequences of not paying your taxes on time:
1. File Anyway!
Even if you can’t pay, make sure that you file by the end of the day today, either your completed tax return or a request for an automatic extension. DO NOT SKIP THIS STEP! If you fail to pay all of your taxes by today, you will have to pay interest on your unpaid balance (whether you file for an automatic extension or not). The interest varies, but it's typically lower than that charged by a credit card.
2. If You Fail To File, You'll Be Charged Much More.
If you don't file at all, the IRS will charge you 5% of what you owe every month for up to five months, up to 25% of your total unpaid taxes. So, if you owe $1,000 but can’t pay and don’t file, you could quickly owe $1,250—plus interest. Wouldn’t you rather just owe the interest?
If you’ve already calculated your taxes, then go ahead and file your return instead of an extension request. After all, an extension doesn’t change what you owe. Once you file the paperwork, the clock starts on the statute of limitations for an audit, so there’s even a small benefit in filing sooner rather than later.
3. Pay What You Can.
Just because you can’t pay everything, you shouldn’t pay nothing. The IRS will accept a partial payment, and you'll only be charged interest for the unpaid portion of your taxes.
4. Get A Short-Term Reprieve.
Will you be able pay up within a few weeks, like after the next pay day? If so, one relatively painless solution is to file your return and send in whatever money you can. The IRS will send you an invoice for the rest. This will usually take about 30 days, so make sure you don’t spend the tax money between the time you get paid and the time the bill arrives. It will, of course, include interest, but that should be a small sum if you file on time.
5. Request An Installment Plan.
Would you rather pay in monthly installments? Just fill out Form 9465. What’s nice about this form is that, instead of the IRS telling you what to pay, you tell them how much you can afford each month. There are two reasons to make those payments as big as you can. First, although the IRS will likely accept your terms, it will continue to charge you interest until your taxes are paid. Second, you can only have an installment plan for one year at a time, so if you don’t have all your 2009 taxes paid by April 15, 2011, you won’t be able to get any extra time for your 2010 taxes. Once approved, setting up the plan will cost you $105 or $52 (if you let the IRS deduct payments from your bank account automatically).
6. Use A Credit Card—But Only If You Have A Low APR.
The IRS encourages taxpayers to pay their taxes with a credit card rather than set up an installment plan. The fact is, even if you file on time and avoid paying penalties, you will still likely wind up paying more this way. The main reason it might make sense to use a credit card to pay taxes is if you have one with a low promotional interest rate (and you can get your balance paid off before the rate shoots up).
7. Ask For An Offer In Compromise—If You’re In A Real Financial Crisis.
If something drastic happened to your finances this year, like a serious family illness that wiped out your assets or the loss of a job, you can ask the IRS for an offer in compromise. That's a fancy way of saying that the IRS might forgive part of your taxes. Remember, though, that this option is only available for those in a serious financial bind.