Last year was a tough one financially. Lots of downsizing, layoffs, mortgage difficulties, credit card debt. Consequently, you may think you won't owe Uncle Sam any tax money come April 15th. I hope you're right, but unfortunately you might be wrong. Three surprising taxable events
1) Unemployment benefits. If you collected unemployment benefits during 2008, you may owe the IRS. These benefits are taxed.
2) Freelance income. If you worked part-time as a freelancer or consultant and your employer did not withhold taxes, you must pay income and self-employment taxes on that money.
3) Money from a retirement account. If you tapped into your IRA or 401(k) to pay your mortgage, tuition bill or credit card debt, you'll be taxed and in some cases also be hit with a 10%early withdrawal penalty.
What to do if you can't pay
What if you don't have cash on hand to pay the IRS next month? Be sure to file your return anyway. If you don't, the IRS can come after you forever. On the other hand, if you file they can still chase you, but only for 10 years! Additional problems that come with not filing a return: a failure to file penalty and late penalties. Combined, these penalties could be as high as 46.5% of the total amount you owe the IRS!
Here are 4 possible solutions:
Extension. Request an extension to pay. Sometimes, in some situations, the IRS grants taxpayers a short extension. For details, you'll need to call the IRS at: 800-829-1040.
Credit cards. The IRS accepts credit card payments. It also will take out a 2.49% "convenience fee". That's 2.49% of the balance due. You'll find information at: www.pay1040.com.
Installment plan. The IRS will allow you to pay your taxes in monthly installments, typically over a 3 year period. If you owe less than $25,000, go to: www.irs.gov and in the search box type: "online payment plan." You'll be charged $105 to set up this agreement or just $52 if you agree to pay through direct debit. And, of course, the IRS will charge interest on any unpaid balance.
$TIP: The interest rate the IRS charges on unpaid taxes is usually lower than the rate charged by most credit card companies. So run the numbers. The installment plan may turn out to be cheaper than using a credit card - if you know you can't make timely payments.
An offer in compromise. This enables you to negotiate a reduction in your tax bill. But it only works if you can convince the IRS that you have no options left. This involves spelling out what you own, what you owe and what you think your will earn during the next 5 years.
And there's more - you must give the IRS a non-refundable deposit equaling 20% of the amount you are "offering" to pay.
Details: www.irs.gov.
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