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What If I Can't Pay My Taxes on Time? Five Tips That Can Help

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It can be pretty scary to realize that you're going to owe federal income taxes. Even though statistically, half of all taxpayers didn't owe anything in federal income taxes last year, tens of millions of taxpayers did owe the government. If you're one of those taxpayers who owes in 2010 -- but you're not sure that you can pay -- what do you do?

1. File Anyway

No good can come from avoiding the problem altogether. The IRS can issue two types of penalties: failure to file and failure to pay. If you make the effort to file on time, you've solved half your problem.

2. Pay as Much as You Can

Don't believe anyone who tells you not to pay anything if you can't pay it all -- that's terrible advice. Penalties and interest can accumulate on the outstanding tax balance. The lower the balance to begin with, the less you'll have to pay over time.

3. Consider Tapping Another Source of Payment

You know that the IRS accepts checks or money orders in addition to electronic debit. But the IRS also accepts credit cards -- if this is a viable option for you, consider making a payment using a credit card in order to avoid IRS penalties. Additionally, if you have another source of funds available, such as a line of credit or home loan, it might be a good choice to use those rather than pay interest and penalty to the IRS (this isn't always the case and depends on your own financial situation).

4. Enter Into an Installment Agreement

The IRS may enter into an installment agreement with you, which would allow you to pay over time. There's a fee for this service and you must make timely payments; you must also continue to timely file your tax returns. To request an installment agreement, call the toll free number on your bill or complete a federal form 9465, Installment Agreement Request. If your total obligations are less than $25,000, you can apply for an installment agreement online.

5. Ask for Help

If have a severe financial hardship, the IRS may temporarily suspend certain collection action until things get better. Interest and penalties will continue to accrue and the IRS may file a lien -- but efforts to collect will be suspended. Call the phone number listed on your tax bill to discuss this option.

6. Submit an Offer in Compromise

If an installment agreement doesn't work out for you, consider submitting an Offer in Compromise (OIC). An OIC is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax liability by payment of a reduced amount.

I would caution that despite TV commercials touting that you'll only have to pay "pennies on the dollar" to the IRS, this should really be something to consider when your other options have been exhausted.

This said, a majority of OICs are turned down by the IRS, and the associated fees to file (both out of pocket expenses and for tax professionals) can be quite significant. If you opt to file an OIC with the aid of a tax professional, steer clear of the OIC mills and find a competent, honest tax professional who can walk you through the process.

Whatever you do, don't hide from your obligations. They won't go away -- and if you avoid them, the IRS may levy your bank accounts or wages. Being proactive can go a long way toward making a bad situation better.

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