March Madness is sure to be followed by April Angst and the national anxiety over the looming tax deadline. It's a stressful time for everyone, but especially so for those who have doubts about their ability to pay the Internal Revenue Service (IRS).
Is paying the piper with plastic an acceptable answer? Odysseas Papadimitriou, CEO of the credit-card comparison website Cardhub.com, has some advice for those who may find it difficult to pay.
Don’t try to hide.
Trying to pull a disappearing act just isn't going to work. You're simply not going to be able to slip through the cracks, and the IRS is far more willing to work with people when they're honest about their inability to pay, Papadimitriou said. Even if you can't pay in full, it will serve you better in the long term to file your return by the April 15 deadline and establish an open dialogue with the tax-collection agency.
Feed your head. There's a wealth of reliable tax information on the Internet, and reading up on your options is a great first step in formulating a plan, Papadimitriou said. You can also seek more personalized feedback from a variety of tax experts, including third-year law students, who offer advice at free tax clinics that many schools offer, as well as more experienced accountants and lawyers, who sometimes offer free consultations.
Wait for the bill. If your inability to pay is due to a temporary cash-flow crunch, you may just want to submit your return and wait for Uncle Sam to send you a bill, said Papadimitriou. The IRS currently charges 3 percent interest on underpayments, as well as a monthly late fee equal to 0.5 percent of the amount you owe ― which, depending on how much you owe, could be a fairly palatable price for a bit of extra time. However, you should only use this strategy if you need less than two or three additional weeks to pay your taxes. After all, it will take the IRS 10 days to process requests for an extension or payment plan. However, you still want to make sure not to get on the agency’s bad side.
Get a 120-day extension. You can apply for a 120-day payment extension from the IRS. There is no application fee for this short-term extension, but you will be charged a late-payment fee and 3 percent interest on the amount you owe. Some people may qualify for a waiver of fees and interest via the IRS’ Fresh Start initiative.
Apply to pay in installments. If you owe less than $50,000 (including principal, interest and fees), you can apply to pay off your tax obligation over time by filling out Form 9465, Papadimitriou said. If you owe more than $50,000, you can apply by filling out Form 433-F. Keep in mind that you will have to pay a one-timefee for setting up a payment plan ― $52 if you sign up to have payments automatically deducted from a checking account every month, $105 if you want to mail a check.
Make an “offer in compromise.” You may be able to negotiate a type of settlement with the IRS known as an “offer in compromise,” which allows you to satisfy your obligation via a lump-sum payment or a payment plan for less than the total amount you owe. The IRS is likely to accept such a deal if the amount offered is around what they can reasonably expect to collect from you in the foreseeable future, considering your income, expenses, asset equity and overall ability to pay.
Pay with plastic. In certain situations, it may be financially beneficial to pay off your tax obligation using a credit card. However, do so with caution, Papadimitriou advised.
"Strategically using a credit card to pay your taxes is an appealing option, regardless of whether or not you actually need extra time to come up with cash," Papadimitriou said. "The current environment is one in which people with above-average credit can obtain 0 percent financing for well over a year or initial rewards bonuses worth hundreds of dollars, simply by opening the right new credit card.
“So, whether you pay with a credit card in order to gain some breathing room or to meet the spending threshold required to earn an initial rewards bonus, you’ll win out ― as long as the ultimate payoff exceeds the costs you’ll incur via processing fees, late fees and interest,” Papadimitriou added. “Just make sure to crunch the numbers beforehand in order to make sure your proposed approach is the most cost-effective option available to you.”
Reach BusinessNewsDaily senior writer Ned Smith at firstname.lastname@example.org. Follow him on Twitter @nedbsmith.Follow us @BNDarticles, Facebook or Google +.