updated 4/3/2009 12:20:48 PM ET 2009-04-03T16:20:48

The clock is ticking down to April 15 and it's time to pay the tax man.

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But if your 1040 form says you owe more than you have in your bank account, what should you do?

"Don't bury your head in the sand and hope it goes away," warned Chas Roy-Chowdhury, head of taxation for the Association of Chartered Certified Accountants.

If you owe taxes and you don't pay, the Internal Revenue Service can eventually go after your bank account, your paycheck or other assets. But cash-strapped taxpayers have options that won't result in a padlock on your front door. The key is not waiting for the IRS to act first.

Go ahead and file
Tax experts say the most important step is to make sure you file your return on time.

"Deal with it and move on with the consequences, rather than have the IRS take control to determine how much tax you have to pay," Roy-Chowdhury said. You're more likely to owe less if you prepare a return that includes all the credits and deductions you're entitled to, than if the government figures your tax, he said.

Late filing, or not filing at all, can increase your tax bill by 25 percent or more when penalties and interest are added in, the IRS warns on its Web site.

And don't think you can delay the inevitable. You can easily get an extension to file your return, but you're still expected to pay any tax you owe on time, noted Barbara Weltman, a tax attorney who has written several books on taxes for J.K. Lasser.

Create a plan
Once you know how much you owe, it's time to come up with a plan for paying it off.

If you don't have the cash, you can use a credit card, Weltman noted. But you'll pay a hefty fee for doing so through one of the two IRS-approved payment processors — almost 2 1/2 percent of what you're charging. "It's certainly a steep way to build your frequent flier miles on your credit card," she quipped. You'll also have to pay whatever interest your credit card charges.

A payment agreement with the IRS itself may be a lower cost option for some people.

If you owe less than $25,000 and you've got no lingering tax issues from past years, you can file online at IRS.gov for a short-term extension or installment payment plan.

If you think you can come up with the money in three months, you can request the short-term extension and get 120 days extra to pay. There is no fee for an extension, but a 0.5 percent penalty and 4 percent per month interest will be added.

If you need more time, you can apply for an installment plan. A monthly payment plan comes with some hefty costs, starting with a $105 one-time user fee. That fee will be reduced to $52 if you agree to make your payments online, and low-income taxpayers may be able to get it cut to $43.

The online program calculates monthly payments based on your income, allowing for living expenses. It also adds in penalties and interest. Currently, the interest rate assessed would be 4 percent. The late-payment penalty is cut in half, to 0.25 percent, for installment plans if your return was filed on time.

With any of these options there's an important caveat. The IRS may file a Notice of Federal Tax Lien if you use an installment plan, which is a black mark on your credit report. "It's worse than late payments," said Gerri Detweiler, a credit adviser at Credit.com. A lien falls into the "serious derogatory" category, along with things like bankruptcies and court judgments, she said.

Moreover, tax liens can stay on your credit report longer than other negative information. And the IRS has been criticized in the past for not notifying credit reporting agencies promptly when taxpayers have paid up, Detweiler added. Taxpayers who have paid off installment agreements should make sure they get a copy of a release of the lien and confirm that the credit reporting agencies have noted it, she advised.

While most tax liabilities are for less than $25,000, if you owe more, you will have submit a special form, IRS Form 9465 to request an installment agreement. This should be accompanied by Form 433-F, which asks for information the IRS will use to determine your installment payments.

"The key thing is showing your earnestness about trying to resolve the problem as soon as possible," said Benson Goldstein, senior manger of taxation for the American Institute of Certified Public Accountants.

Offer to compromise
You can also make an "offer in compromise," requesting a deal with the IRS to pay only a portion of what's due. Such an offer must be calculated using an IRS formula, but will still be for far less than the original amount. "It's a fairly set process as to how much would be a reasonable offer from the IRS's perspective," said Goldstein.

"The IRS doesn't grant these routinely," Goldstein warned, adding that when you make such an offer, it must be accompanied by a payment of 20 percent of the total you're willing to pay.

The offer in compromise process can be complicated and tedious, he said. So it's best to have a professional guide you through it you reach this point.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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