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TAXES ARE DUE TUESDAY. NO CASH?

April 15, 2007

It happens every year. Sometimes there are even good reasons. The return is ready, the taxpayer owes a bunch, and the cash isn't there. You don't have any investments you can turn into cash immediately. What to do?

DON'T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don't file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.

FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can't pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.

Also, the tax regulations don't impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments - currently 8%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.

BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative, take advantage.

NOWHERE TO BORROW? Then it's time to fill out Form 9465, Installment Agreement Request. You can do this online. If you own more than $25,000, you may need to file additional infomration on Form 433f. Of course, if you owe that much, you need professional tax help anyway.

Once you get the installment agreement in place, live up to it. The IRS gets ugly in a hurry if you fall behind on an installment plan.

And whatever you do, don't bounce a check. It only makes your penalties worse. And work with a professional so you don't get caught short next year.

This is another of our series of filing season tax tips. There's a new one every day through April 17 at www.taxupdateblog.com.

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