Tips from CardHub on what to do if you can't pay the IRS

2013-04-03T16:00:00Z Tips from CardHub on what to do if you can't pay the IRSArizona Daily Star Arizona Daily Star
April 03, 2013 4:00 pm  • 

Cardhub.com offers the following tips to those who might have trouble paying what they owe the IRS this tax season. It also has pros and cons of using your credit card to pay.

Don’t try to hide: You’re simply not going to slip through the cracks, and the IRS has proven far more willing to work with people when they’re straightforward about their ability, or lack thereof, to meet tax obligations. So, submit your return by the April 15 deadline and establish an open dialogue with the tax collection agency.

Leverage free advice: There’s no shortage of reliable tax information on the Internet, and reading up on your options is a great first step in formulating a plan. You can also seek more personalized feedback from a variety of human sources, including third-year law students at the free “tax clinics” that many schools offer and more experienced accountants and lawyers who offer free consultations.

Just wait for a bill: If a temporary cash-flow interruption is at the heart of your inability to pay, you may want to submit your tax return and simply wait to receive a bill from the IRS. The tax collection agency notifies people who have existing tax obligations of what they owe, plus any interest and late fees, a few weeks after the April 15 filing deadline has passed and it’s had the chance to process returns submitted by then. The IRS currently charges 3% interest on underpayments as well as a monthly late fee equal to 0.5% of what you owe, which is a fairly palatable price to pay for buying yourself a bit of extra time. You should only use this strategy if you literally need 2-3 extra weeks to pay. After all, it will take the IRS 10 days to process requests for an extension or payment plan anyway, but you still want to make sure not to get on the agency’s bad side.

Get a 120-day extension: You can apply for a 120-day payment extension from the IRS. There is no application fee for this short-term extension, but you will be charged a late-payment fee and 3% interest on your outstanding payment. Qualifying individuals may be able to get fees and interest waived through the IRS Fresh Start initiative.

Set up an installment agreement with the IRS: You can apply for the ability to pay off your tax obligation over time by filling out Form 9465 if you owe less than $50,000 (principal, plus interest and fees) as well as Form 433-F if you owe more than that. Keep in mind that you will have to pay a fee for setting up a payment plan: $52 if you sign up to have payments automatically debited from a checking account every month, $105 if you want to mail a check or have a portion of your paycheck garnished, or $43 if your income is below a certain level. The IRS doesn’t usually attempt collections while an installment agreement application is being considered, when such an agreement is in effect, or for 30 days after an application has been rejected.

Make an offer in compromise: You can negotiate a type of settlement with the IRS, known as an offer in compromise, which allows you to satisfy your obligation via a lump-sum payment or a payment plan for less than the total amount you owe. The IRS is likely to accept such a deal if the amount offered is around what they can reasonably expect to collect from you in the foreseeable future, considering your income, expenses, asset equity, and overall ability to pay. There is a $150 application fee for an offer in compromise.

Use a credit card: In certain situations, it’s financially beneficial to pay off your tax obligation using a credit card and thereby shift your debt away from the IRS to your card’s issuer.

Pros and cons of using a credit card

Pros:

Long 0% intro terms available: Credit cards now offer 0% introductory interest rates for up to 18 months, which means you can prevent your tax obligation from growing while you find the cash to pay it by simply using the right card. Such attractive intro terms aren’t always available, however, so make sure you’ll be able to pay off your balance before high regular rates take effect and eat away at your savings.

Ability to earn rewards: Credit card companies are offering initial rewards bonuses worth up to $500 and as much as 2% cash back on new purchases. So, even if you are able to pay what you owe Uncle Sam, the price might be right to use a credit card in order to snag valuable rewards.

Cons:

Processing fees: The IRS gives you the option of submitting a credit card payment through one of five processing companies. These companies charge between 1.88% and 2.35% for credit card payments, so the value of paying with plastic depends on the amount you owe and the alternatives at your disposal.

High regular interest rates: Even the best 0% credit cards have regular rates ranging from 9.99% to 24.99%, which can make any balance leftover at the end of the 0% intro term grow fast.

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The Star’s Centsible Mom, Angela Pittenger, will blog about great deals, tips to stretch your dollars and ideas for living frugally.

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