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Wednesday, April 05, 2006

WHAT IF YOU CAN'T PAY YOUR INCOME TAXES BY APRIL 17?

With April 17 approaching, there will be some taxpayers who will be unable to pay their income taxes on time. Such taxpayers should nonetheless timely file their tax returns - the IRS imposes separate penalties for late filing and late payment so by filing (even though not paying), the late filing penalty is avoided.

The late payment penalty is 0.5% of the net tax tax due (reduced for credits for withheld taxes and estimated taxes) for each month that the payment is late, up to a 25% maximum. Of course, interest also applies to the unpaid taxes.

Here are some ideas to avoid the penalties (and interest, if the tax can be paid):

a. Borrow the tax payment from friends or family.

b. Bank loans (including home equity loans).

c. Credit card payment (where allowable by the credit card issuer). However, these providers charge a 2.49% fee, plus their usual interest.

d. Request an installment payment agreement from the IRS (using Form 9465). There is a $43 fee for these agreements. Interest is still charged on the unpaid tax, but the late payment penalty is reduced by 50% if the return is filed by the due date (including extensions).

e. Possible qualification for a 120 day extension to pay, or a payroll deduction installment agreement with the IRS.
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