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Can’t Pay Your Taxes? Here’s What To Do

Don't let a cash shortage keep you from filing your 2013 return

By Bill Bischoff | MarketWatch | April 4, 2014

(This article appeared previously on MarketWatch.com.)


As the filing deadline for your 2013 tax return looms ominously, you have two rational choices:
 
Ship your return off by April 15 or get a filing extension by that date.
 
This advice holds true even if you don’t owe any tax — and moreso if you owe money but can’t pay on time.
 
If You Know You Don’t Owe
 
Say you’re certain you don’t owe any additional federal income tax for last year. Maybe you had low taxable income or already paid in full your tax bill via withholding or estimated payments. Now you’re tempted to blow off filing because you’re missing some records and too busy at work. And you don’t want to bother with extending the filing deadline for your return either.

No problem, since you don’t owe. Right? Wrong.

(MORE: Smart Ways to Spend Your Tax Refund)
 
While it’s true that not filing your return will not result in any IRS interest charges or penalties, failing to file or extend is still a bad idea. Here’s why:
 
1) You may be due a refund for 2013, but you must file a return to get your money back.
 
Until you file a return, the three-year statute of limitations period for the commencement of an IRS audit never gets started. The IRS could decide to audit your 2013 tax situation five years (or more) from now and hit you with a tax bill plus interest and penalties. By then, you may not be able to prove you actually owed nothing.

In contrast, if you file a 2013 return showing zero tax due, the government generally has only three years to begin an audit. Once that three-year window closes, 2013 is water under the bridge, even if the return had some warts.
 
2) You might have capital losses in excess of what you can deduct in 2013. Those capital losses can be carried forward to lower your tax bills in future years, but only if you file a 2013 return.

(MORE: 7 Ways to Avoid an IRS Audit)
 
If you had an overall tax loss in 2013, you may be able to carry it back as far as your 2011 tax year and claim refunds. Alternatively, you can carry the loss forward for up to 20 years.

However, until you file a 2013 return, your loss doesn’t officially exist, and no refund claims are possible.
 
There are other more esoteric reasons that apply to taxpayers in specific situations.
 
The bottom line is you need to either file by April 15 or — perhaps more realistically — get an extension and file later when you have more time.

Getting an Extension is Easy
 
The IRS will automatically approve any request for a four-month filing extension to August 15. Simply file Form 4868 by the April 15 deadline. You can download Form 4868 from the IRS website at www.irs.gov. Completing it usually takes just a minute or two.
 
You don’t need a reason for the extension, and signatures are not required. For example, if your spouse is incapacitated or unavailable to sign, that’s no problem.
 
The only requirement is that you must estimate with reasonable accuracy your total 2013 federal income tax liability and any amount still owed (which could be zero) on Form 4868.
 
If You Owe, But Don’t Have the Dough
 
Lack of money is no excuse for failing to file or get an extension. Here’s why:
 
If you file by April 15 but can’t pay, you can probably arrange for an installment payment agreement, as explained below.
 
If you’re not ready to file, just send in the extension request Form 4868 on or before April 15.
 
Either way, you’ll successfully dodge the expensive and totally unnecessary 5 percent a month failure-to-file penalty — even though you don’t pay on time. However, the government will charge you interest at a much more reasonable rate (currently .75 percent a month, which equates to a 9 percent annual rate) until you pay up.
 
If you go the extension route, you must close the deal by filing your return by no later than August 15. If you know right now that you still won’t have gathered together what you owe even by that late date, relax. You can still arrange for installment payments when you file.
 
If you fail to file or extend, the IRS will be delighted. You’ll be charged the 5 percent a month failure-to-pay penalty until it hits 25 percent of what you owe.

For example, if your unpaid balance at April 15 is $10,000, you’ll rack up monthly failure-to-file penalties of $400 until you max out at $2,500 (25 percent of $10,000). After that, you’ll be charged interest until you settle your account (as mentioned, the current rate is .75 percent a month).

How to Request an Installment Plan 
 
Save your bacon with an installment agreement, or arrange to borrow from the IRS by requesting permission to make installment payments on your tax bill.

Do this by filing Form 9465 (Installment Agreement Request) with your 2013 return — either on April 15 or by August 15 if you extend.

Filling out Form 9465 is pretty simple. You suggest your own terms. For example if you owe $6,000, you might offer to pay $200 on the first day of each month.

Approval is automatic if you owe less than $10,000 and propose a repayment period of 36 months or less. For higher amounts or longer repayment periods, the IRS will require some financial information.

On approval, you’ll be charged a $120 setup fee or $52 if you agree to automatic monthly withdrawals from your checking account. As long as you have an unpaid balance, you’ll be charged interest at a reduced rate: currently only .5 percent a month, which equates to a 6 percent annual rate. That is probably lower than what a commercial lender would charge.
 
Pay with Your Credit Card

You can also pay your federal income tax bill with Visa, MasterCard, Discover or American Express. If you choose this option, you will be charged a one-time transaction fee (which can range from 1.87 percent to 2.35 percent) plus the usual credit card interest rate.

For details on paying with credit cards, go to www.irs.gov and click on the Payments link. Note that the IRS installment payment option is often cheaper than paying with a credit card.
 
Maybe the reason you can’t pay is strictly due to a short-term cash crunch. If that’s your situation, file by April 15 and pay what you can. The IRS will then bill you for the balance. That should take at least 30 days.

Then, pay when you get the notice. You’ll be charged interest, but it won’t amount to much for such a short time. 

Bill Bischoff covers tax and retirement issues for MarketWatch.com