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Tax Prep & Filing

What to Do When You Can't Pay Your Taxes

An IRS installment plan can be more affordable than paying with plastic.

Most taxpayers probably think asking the IRS for a loan is about as smart as going to a neighborhood loan shark. But, think again.

See Also: SLIDE SHOW: 14 IRS Audit Red Flags

If you, or your kids, find yourself in the unenviable position of being unable to pay what owe with your 2014 return, going on the government’s installment plan might be the most economical solution.

First of all, if you don’t have the cash to cover your bill, don’t even think that simply not filing is a solution. There are tough penalties for failing to file.

Of course, you could charge what you owe to a credit card. But that can be expensive. Let’s say you owe $10,000. One of the firm’s that handles credit card payments for the government would charge you a $235 “convenience fee” to do the deal. And if your card charges 19% interest, and you pay off that $10,000 over two years, you’ll also pay about $2,100 in interest. The cost of paying with plastic: $2,335.

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Now, consider setting up an installment plan with the IRS. You do that by filing Form 9465. And you get to propose how much you can afford to pay each month. If you owe less than $50,000 and can pay it off in under six years, approval of your plan is almost automatic.

The IRS charges $120 to set things up, or just $52 if you agree to have your payments electronically debited from your bank account or paycheck. Of course you’ll owe interest and penalties, too. But the IRS interest rate is now just 3%. And the penalty for late payment drops for one-half a percent a month to one quarter of a percent if you’re on an installment plan.

If you pay off a $10,000 tax debt over two years under the installment plan, it will cost around $700 in interest and penalties--far less than the cost of using your credit card.

If an installment plan is for you, file Form 9465 with your return. You can also apply online if you owe less than $50,000. Within 30 days or so, you’ll hear from the IRS on how to proceed.

For more advice on preparing your federal tax return see our Special Report on Tax Prep & Filing.