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CAUGHT SHORT?

April 11, 2008

It happens. Sometimes, for some taxpayers, April 15 comes and there isn't enough cash on hand to cover what the IRS wants. 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.

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 or significant other, take advantage.

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 6%. 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 FROM THE IRS. Many taxpayers can set up an installment agreement with the IRS online. You can also apply for an installment agreement by filling out Form 9465 and filing it with your timely-filed tax return, along with a check for whatever you can afford to pay now.

If you get an installment plan in place, live up to it. Once you fall behind, things can get ugly quickly.

Remember, too: The Iowa return and payment isn't due until April 30, so you have time to come up with cash for them.

And whatever you do, don't bounce a check. They really don't like that.

Link: IRS release on "Payment Options Available for Those Who Can’t Pay in Full"

This is part of our daily series of 2008 filing season tips running through April 15.

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