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Owing the IRS Money – What Should I Do?

Posted by Jamie Downey  March 6, 2009 07:45 AM

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My wife and I just prepared our 2008 tax return. To our dismay, we owe over $6,000 to the Internal Revenue Service and we do not have the money to pay this in full. I want to wait to file the tax return until we have the money to pay the full amount. My wife thinks we should file the tax return now and pay the balance due with our credit cards. What should we do?

Federal tax law requires all of us to file our tax return and settle our tax liability in full by April 15th. Failure to file your return or pay on time will trigger various interest and penalties. Although owing interest and penalties to the IRS sounds distressing, you can save significant amounts of money if you handle this properly. There are three assessments that the IRS can levy on you. They are summarized as follows:

Failure to file – If you do not file your tax return by April 15th and owe taxes, the IRS will assess you a “late-filing penalty” of five percent per month of the tax owed. In your case, this penalty would be over $300 per month. The late-filing penalty is capped at 25 percent per year. This assessment is the most destructive of all penalties and can easily be avoided. By merely filing your tax return on time, you will avoid this penalty. So PLEASE make sure you file your tax return by April 15th, regardless of your ability to pay.

Interest – The next assessment the IRS will levy on you is interest. You will be charged interest on any unpaid tax balance. This assessment will commence April 15th and will continue until you have paid the balance in full. The interest rate charged to the taxpayer is the federal short term interest rate plus three percent. For the first quarter of 2009 the interest rate charged by the IRS is five percent.

Failure to pay penalty – The final assessment that the IRS will levy on you is a “failure to pay” penalty. You will have to pay a penalty of one half of one percent per month of the tax owed. As such, this will work out to approximately six percent per year.

I suggest you file your tax return no later than April 15th. Submit the maximum payment you can afford with your tax return. For any remaining balance due, you will be subject to penalties and interest totaling approximately 11 percent. The 11 percent is much more manageable than the 36 percent you would be charged if you also did not file your tax return.

If you can borrow money at a rate of 11 percent or less from your credit card company, you should do so and pay off the tax liability. If not, just “borrow” the money from the US Treasury and pay them back as quick as you can.

The Managing Your Money blog is here to help you with any tax or personal finance related questions. We encourage you to submit your question at the right side of this webpage.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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