What can you do if you can’t pay the taxes you owe come April? Should you borrow from your 401(k) or is there an IRS tax payment plan option? This is especially important for many Americans that collected unemployment for the first time this year, and didn’t realize that unemployment benefits are taxable. Many of them are in precarious and vulnerable position. In this article, H&R Block walks you through a few options — from borrowing from your 401(k) to arranging an IRS tax payment plan.
“Any taxpayer who is unable to pay his or her tax bills should still complete a return or file a tax extension by April 18, to avoid costly penalties and interest,” said H&R Block social media manager Leigh Mutert, CPA. The monthly penalty for not filing a tax return is 5%, while the penalty for not paying in full is one-tenth of that, or 0.5%. Even if you cannot pay all of your taxes, you should send what you can with your tax return or extension to file.
An H&R Block professional tax advisor can help you determine what’s best for you; get a free 30-minute tax consultation at an H&R Block office near you.
If you cannot afford to pay your taxes, there are three ways to deal with this.
Taxpayers can work with the IRS to file a tax extension to pay or to arrange an IRS tax payment plan. Interest rates and fees depend on the route taxpayers choose.
Taxpayers who file a tax extension or opt for an IRS tax payment plan may incur debts on their credit reports, but these debts do not cause the same harm as a property lien.
An IRS offer in compromise (OIC) settles a tax debt for less than the amount owed. The IRS will negotiate with eligible taxpayers to collect what it can. However, only 24% of OICs were accepted in FY2008, and the application process can take up to two years. “It’s not as easy as just asking the IRS to forgive the debt,” Mutert said. “Seeking an offer in compromise is time consuming and requires as much work painting your financial picture as getting a home loan.”
Here are some specifics about OIC:
H&R Block has a 100% accuracy guarantee and will support you in the unlikely event of an audit. H&R Block At Home online and desktop solutions for tax filing make it easy to file in the convenience of your own home, or you can find an H&R Block office near you.
* Includes a $20 failure-to-pay penalty and $13 in interest. Interest is the federal short-term rate (currently 0.67%t) plus 3 percent.
** Application fees range from $43-$105, example uses $52. The failure-to-pay penalty is $6 and interest is $8 (up to 25%).