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Tax Planning

Tax-Relief Hype

"Pennies on the dollar" pitches usually aren't worth a nickel.

Tax troubles keeping you up at night? Then you’ve no doubt seen your fair share of late-night TV pitches to settle your tax debts for less than you owe. Such “pennies on the dollar” come-ons, regardless of the source, demand scrutiny -- especially if they promise an Offer in Compromise with the IRS. Such deals to settle tax debts for less than the full amount are rare. The IRS considered 44,000 OICs in 2008 and rejected 75% of them. An accepted offer will dig deep into your savings and other property, the equity in your real estate and cars, and your future income, less basic living expenses. (You may bristle at Uncle Sam’s interpretation of “basic.”)

There are other ways to catch up with the taxes you owe. If you’re in a short-term bind, you may be eligible for a 120-day extension. Longer-term installment plans typically give you up to 60 months to pay.

If you owe $25,000 or less, you can apply online for an installment payment agreement. Or file Form 9465. If you owe less than $10,000 and can pay up within three years, your request can’t be turned down, as long as the IRS determines that you can’t pay, and you’ve filed tax returns on time for the past five years and have paid what you owed. You will be charged a one-time fee of $105 ($52 if you have payments electronically withdrawn from your bank account), as well as interest, currently 4% annually, and possible penalties, now running 0.25% a month.

Don’t rule out paying by credit card, which may be cheaper than incurring IRS penalties and interest. You’ll thereby avoid a tax lien -- a possibility even with a payment plan -- which stays on your credit report for seven years after your debt has been paid in full.