What to do when you can’t pay your federal taxes

What to do when you can’t pay your federal taxes
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With the deadline to file taxes coming up, I want to take a moment to advise those who can’t afford to pay what they owe the federal government.

The key rule here is don’t hide under a rock if you can’t pay. Instead, file your return on time. Here’s why: The IRS penalty for failure to pay is not nearly as punitive as the penalty for failure to file.

This year, the IRS is extending a payment holiday and waiving failure to pay penalties for people if they meet these criteria:

  • You have been unemployed 30 consecutive days either last year or this year.
  • You are self-employed and your business income is down 25% or more this tax year versus the prior one.
  • The tax bill you owe is no greater than $50,000.

If you fit the bill, the IRS will allow you six additional months (through Oct. 15, 2012) to come up with money without facing failure to pay penalties. Income limitations do apply.

Be sure to file IRS form 1127-A (this is a pdf file) if you want to participate in this temporary tax amnesty program. With this, you still pay interest at an annual rate of 3%. But that’s a real deal!

Another option is to file for an installment agreement request (IRS form 9465) (this is a pdf file) and attach it to the front of your tax return. At that point, you can begin paying the monthly installments you’ve proposed.

The IRS moves at a snail’s pace when replying to installment agreement requests. So they may not get back to you for eight or 12 months. By that time, you may have everything paid off.  If not, and your installment agreement request is denied, that’s the time to enter into further negotiations with the IRS to come up with a solution. But at least you’ll have been working each month in the interim to reduce your tax bill with your monthly payments.

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