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In a hole for April 15? Stop digging

April 11, 2009

So your return is done. You've gathered all the information, the numbers are crunched, and you're satisfied that your 1040's correct. There's just one little problem.

You owe the IRS money that you don't have.

Remember the first rule of holes: stop digging. The best way to get in deeper trouble is to ignore it and fail to file, so don't do that. If you just ignore the problem and neither file nor extend your return, you face a 5% monthly penalty, up to 25%, plus the current 4% monthly IRS underpayment rate. If you never get around to filing, remember that you can go to jail for willful failure to file (ask Wesley Snipes about that).

Some alternatives to help you out of the hole:

Try to scrape up the money. If you have a friendly banker, pay a visit first thing Monday. If that won't work, see if you have some room on a credit card; if you know you have money coming in soon, that might be all you need to tide you over. But if your cash flow problem will go further than the next credit card payment, that might not be a great idea, considering what they charge.

File an extension. Extending the return on Form 4868 doesn't extend the due date for payment of the tax. Still, it can be a way to buy time. While you have to be 90% paid in on your extension to avoid penalties, the penalty for for having to pay up when you timely file the extended return is 1/2% per month, plus the IRS late payment rate of 4%, as long as you file the actual return and pay your balance due by the October 15 extended due date. This works out to about a 10% interest rate, which is cheaper than most credit cards, car title loan shops, and the like, and it beats the heck out of the 5% monthly failure to file penalty. If you know you will come up with the funds to cover your balance due by October, this can work. Just show what you expect to owe, pay what you can, and be darn sure you can come up with the rest soon. And remember, each part month counts as a whole month; if you pay on April 16, you pay the same 1/2% as someone who pays on May 14.

Request an installment agreement. If your cash flow problem is bigger than you can take care of by October, consider an installment agreement with the IRS. Thanks to the miracle of the internets, folks owing under $25,000 can file an Online Payment Agreement Application with the IRS and get instant approval (knock wood). Alternately, you can attach Form 9465 to your timely-filed 1040 to apply for an installment agreement. If you timely file (by April 15 or with a valid extension), installment agreements avoid the nasty 5% monthly penalty, in exchange for the 1/2% monthly charge plus the 4% IRS underpayment rate.

Make the payments. If you fail to pay the balance due when you do file an extended return, or if you fail to meet your installment agreement obligations, things can turn ugly.

Collect all of our 2009 filing season tips!

Tags: Tips for filing 2008 returns.