Personal Finance
Can't afford your tax bill?
March 21, 2001: 8:20 a.m. ET

The IRS has a number of options for those who can't afford to pay in full
By Staff Writer Kim Khan
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NEW YORK (CNNfn) - It can be an ominous feeling, penciling in the amount of federal tax you owe at the bottom of the worksheet and realizing you don't have the funds to cover it. Images of Internal Revenue Service agents releasing hounds could tempt you to change your name and check out flights to countries with no extradition agreement.

But according to tax advisers and the IRS, before you consider fleeing the country you should take a deep breath and look at the many options available to those who can't pay their tab.

No matter what, file on time

The most important first step, tax advisers said, is to make sure to file your tax return on time. That helps you avoid penalties for late filing and also the appearance of trying to dodge the IRS.

"Always file your tax return on time, even if you don't have the money," said Frank Degen, a member of the National Association of Enrolled agent. "The biggest penalty is late filing."

John Roth, senior analyst for CCH Inc., warned that requesting an extension is not the way to go, since extensions apply only for filing difficulties and not for inability to pay.

"The common perception is that you file for an extension to bide your time to get the money together," Roth said. "But then you end up paying interest, a late payment penalty and a late filing penalty."

  The IRS doesn't want to kill anyone; they just want their money  
  Frank Degan
Enrolled agent
The IRS suggests you file on time and include as much of the payment as you can afford. The taxpayer then has a number of choices on how to proceed next.

Many taxpayers are still unaware that the IRS now takes payment by credit cards, which may be the easiest way to settle a debt with Uncle Sam. The IRS now uses two companies, Official Payments Corp. (1-800-2PAY-TAX) and PhoneCharge, Inc. (1-888-ALLTAXX) as facilitators for credit card payments.

(Click here for's complete tax coverage.)

Although the IRS does not charge extra for credit card payments, both intermediary companies charge 2.5 percent of your payment to the government as a "convenience fee."

"There's also going to be the usual 18 percent interest (from the credit card company)," Roth said.

The IRS has agreements with MasterCard, Discover and American Express to accept their cards for payment, but not with Visa.

Pay your tax on lay-away, no money down!

If you are short of both cash and credit, then the best course of action is an installment plan with the IRS, experts said.

If the amount owed is less than $25,000, taxpayers can file an Installment Agreement Request, Form 9465, and request a payment plan for up to five years.

    The IRS offers a number of options for taxpayers who can't meet their obligations
  • The IRS takes credit cards
  • Installment plans up to 5 years
  • Compromise agreements
    Payments are made monthly by check, or can be debited directly from you checking account or paycheck, and the IRS does not require any financial statements.

    There is a $43 charge for an installment agreement, and the IRS charges interest every month of 0.5 percent of the balance due. This interest rate drops to 0.25 percent per month when the installment agreement is officially approved, providing the return was filed on time.

    Degan said the IRS usually responds within in 30 days, and noted the 0.5 or 0.25 percent interest paid is much less than the 5 percent monthly interest penalty for late filing.

    "Pretty much the installment plan is the way to go," Degan said.

    If financial straits are so dire that a five-year payment plan isn't going to cut it, taxpayers may be able to work out a deal with the federal government to pay part of the amount owed, known as an "offer in compromise."

    Again, filing on time is key, enclosing an "offer in compromise" form, Form 656, and a "collection information statement," Form 433A. The IRS will then determine your eligibility.

    Tony Bardi, an enrolled agent, said the IRS "seems to be pretty reasonable" about offers in compromise.

    "They usually don't take the first offer," Bardi said. "We usually first send the bare minimum (offer on behalf of our clients), but if (the taxpayer) files bankruptcy the IRS aren't going to get anything."

    "If you go to them they seem to be pretty reasonable working with the taxpayer," he added. "If someone doesn't contact them it's more work for them and they don't see the motivation and desire from the taxpayer to rectify the situation."

    "They have probably heard every excuse in the book, so be straight with them and they'll help you out," Roth said.

    Information about eligibility for installment plans and compromise agreements can be found at the IRS Web site.

    The dreaded penalty

    The full wrath of the IRS can easily be avoided by communicating with them and addressing the problems. But simply avoiding the taxman can bring the maximum penalty.

    "You can be looking at 25 percent of the tax that is owed, plus all the interest," Degen said. "If you don't pay then the IRS can take some pretty Draconian measures."

    "But the IRS doesn't want to kill anyone; they just want their money," he added.

    To avoid the fate that befell Al Capone, experts recommend the taxpayer take immediate steps to figure out why they owe so much money.

    "A lot of times people with a home business don't realize they have to pay estimated taxes," Roth said. "This is where an accountant comes in. It may cost you now, but will save you a lot of money down then road."

    He also said software programs like TurboTax have features to help individuals find out why they are paying so much.

    Sometimes the taxpayer may have estimated their tax bill appropriately but is hit with a sudden cash flow problem, such as a payment being unavoidably delayed or an emergency trip. In that case, Roth said the oldest remedy might be the best.

    "Go talk to mom and dad, the best loan company in the world," he said. graphic