|
 Now what?
“The key element is proactivity,” says Lance D. Christensen, a
certified public account and partner with Margolin, Winer & Evans, a
CPA and business advisory firm in Garden City, Long Island.
“Be proactive in filing for an extension. Be proactive in
communicating your inability to pay. If the collections unit of the
IRS reaches out to you first, things can get ugly.”
No matter how much you owe, throwing in a portion of your payment
immediately “as a peace offering” is your best option, says Bill
Farmer, an enrolled agent in Lexington, Kentucky.
(An enrolled agent is a person who is able to represent taxpayers
before the IRS.)
Farmer calls this an unofficial payment plan. “If you owe a big
balance on the due date, send the IRS about 40 percent of what you
owe,” he says.
In about six weeks, you will get a letter explaining the full
balance of what you owed and that you only paid part of your bill.
If you have the balance by then, write the check. If you do not have
the balance, send as much as you can, he advises.
Delaying payment can only last for so long, though. And it only
works if you owe less than $25,000.
If you owe more than that, you will need to do whatever possible to
reduce your outstanding balance to that sum, then go on a payment
plan that will give you up to 60 months to repay, using Form 9465.
Setting up a payment plan is easy, although it requires an
origination fee of $120. If what you owe can be paid off within the
next four months, says Farmer, call the IRS and request that time to
pay in full.
Keep in mind that everyone who pays taxes late will be assessed
penalties and interest.
If you fail to file any tax return at all – the worst possible
choice – you will be charged 4.5 percent interest from April 15
onward. If you file but are unable to pay the full amount owed, the
IRS levies a fee of .5 percent interest on the balance until it is
settled.
For those who fail to file and fail to pay anything at all, the
penalty can be as much as 25 percent of what you owe.
Farmer sees this problem fairly often when clients sell a home, have
not paid capital gains tax and suddenly owe $10,000 to $15,000 as a
result.
The IRS does not always apply a penalty to late payers, though.
Farmer has seen some owing $5,000 to $6,000 who escape it, while
those owing $10,000 are more likely to pay a small penalty.
[to top of second column] |
COMING UP WITH CASH
But where to quickly access funds?
“Borrow the money from the bank or credit cards, or even family or
friends,” says Daniel Henn, a CPA based in Rockledge, Florida. “You
generally don’t want the federal government as a creditor.”
Henn’s advice? Sell something such as stocks, bonds and mutual
funds. Cash in a certificate of deposit or hold a garage sale.
As a last resort, you can withdraw funds from an IRA or 401(k),
which has its own set of tax implications. Another option – although
it is far from ideal - is to borrow against your 401(k). Most plans
allow for a loan of up to 50 percent of your balance.
Generally, taxpayers with assets are best off with an installment
agreement.
“If the tax can be paid off within a 60-month period, it’s a rather
simple process to get this approved,” says Crystal Stranger, an
enrolled agent in Honolulu, Hawaii. “Lack of income and having
assets can be a dangerous IRS situation, though, as when collections
gets wind of this they are likely to escalate the process of
attaching liens.”
A lien is a public notice, filed in your local courthouse, that you
owe money to the IRS. It can cost 30 points on your credit score and
will make obtaining credit more difficult. If you try to sell an
asset, you will need to pay off your IRS debt first before accessing
any of those funds.
A levy is the next step after a lien and can be imposed through your
employer – clawing back a portion of every paycheck or contractual
payment – or your bank, freezing your assets to repay your unpaid
taxes. Once the IRS has served notice of a levy, you have 21 days to
respond and negotiate terms with them.
(Editing by Lauren Young)
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