Can't Pay Your Taxes by the April Due Date?

• Posted on April 5, 2011
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The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who ended up owing?   

The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest of late payments if you don’t.  It is often in your best interest to make other arrangements for paying your taxes rather than be subjected to the penalties and interest.  Here are a few options to consider.

• Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
   
• Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS.  However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
   
• Installment Agreement – If you owe the IRS $25,000 or less, you may qualify for an installment agreement where you can make monthly payments up to five years.  You will still be subject to the late payment penalty, but it will be reduced by half.  Interest will also be charged at the current rate, and there is a user fee to set up the payment plan.  In making the agreement, a taxpayer agrees to keep all future years current.  If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed.
   
• Tap a Retirement Account – This is possibly the worst option to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket and adds more taxes to your existing problem.  In addition, if you are under age 59-1/2, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.  

Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do.