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Getting the IRS off your back
Not only are you not getting a refund, you owe more than expected. Here's how to handle the debt.
April 9, 2004: 2:56 PM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) Everyone you know is getting a refund this year, except you. In fact, you have to pay the piper even more.

Maybe you got slammed with the alternative minimum tax. Maybe you just didn't have enough withheld during the year. Or maybe you've been audited and what you owe from a prior year is piling up.

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Whatever the reason, you've got a big bill to pay and you're not exactly swimming in cash.

You may think filing for extensions will help. That way, you won't have to pay what you owe until well after April 15, right? Wrong.

An extension grants you extra time to file, not extra time to pay. So whatever you owe Uncle Sam is due by April 15. Whatever you don't pay by then will accrue interest and possibly late payment penalties, too, if you haven't paid at least 90 percent of your total tax already.

So even if you can't foot your entire bill by April 15, you should do two things to minimize what you owe. First, file your return or request an extension by April 15. Otherwise, you'll get hit with steep failure-to-file penalties. Second, pay whatever you can at that time so as to reduce your overall bill, said certified financial planner and enrolled agent Barbara Steinmetz.

Brother, can you spare a dime?

Whether you're shooting to pay your bill in full by April 15 or sometime after that, your best bet is to do so without involving the IRS.

Certified financial planner Mitch Swanda with USAA recommends you try tapping the cheapest sources of funding first. Two that top the list are an interest-free loan from a relative or friend and an emergency fund if you have it.

Just make sure you replenish that fund within a reasonable amount of time, Steinmetz said.

If neither of those options is available or they can't satisfy your debt, consider a home equity loan or line of credit, suggested David Mellem, an enrolled agent in Wisconsin. Rates are still reasonable, and while you'll pay interest on the loan, you may often deduct it.

Next, consider a short-term, low-interest credit card loan, said Steinmetz, who normally is opposed to credit card debt. But if you can get a short-term teaser rate of no more than 6 percent and you're confident you'll be able to pay off the balance before the introductory period ends, it may save you a lot of headaches down the line.

Last, if you have a life insurance policy, you might be able to borrow against the cash value. But understand that you're robbing Peter to pay Paul, and your beneficiaries may not get as big a payout if you're unable to repay the loan, Steinmetz noted.

Easy payment plans

If none of those options are realistic or they won't cover your total tax liability, there are two options from the IRS you might consider requesting.

The first is an installment agreement. The IRS will let you suggest the amount you can afford to pay monthly and the due date by which you'll have paid off your balance. You'll be charged interest and a reduced late payment penalty.

Mellem has set up installment agreements for clients who owe as little as a few thousand dollars to as much as $35,000.

One suggested guideline for figuring out how much to pay per month is this: Divide the tax you owe by 30. That's how much you should plan to pay every month for 36 months. The first 30 months will pay off your balance and the next six will go toward interest and penalties, Mellem said.

So, for example, if you owe $30,000, you'll pay $1,000 a month for 36 months for a total of $36,000.

But consider carefully whether you need an installment agreement given how much you owe. "If you can get (the balance) paid by the due date of your return plus extensions, don't do it," Mellem said.

(For more on installment agreements, click here.)

But what if you really can't afford to pay?

Now, if you owe so much, you're choking say, you can't afford to make payments on an installment agreement -- you might consider requesting an "offer in compromise" (OIC).

With an OIC, the IRS basically agrees to accept a portion of what you owe as a way to satisfy your debt. In negotiating one, you might do better if you're represented by an enrolled agent or CPA, who know the ins and outs of the system.

Generally speaking, the IRS will only enter into such an agreement under one of three conditions:

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There is some doubt that the assessed tax is correct. A taxpayer may not agree with the IRS's assessment but can no longer afford to pay for representation and doesn't wish to go to court over the issue, Mellem said.

There is some doubt that you could ever pay what you owe. If it's clear you don't and won't have the assets to pay your debt in full, the IRS may consider a reduced bill.

You have assets to pay what you owe, but doing so would create economic hardship or be seen as inequitable. Here are two examples from Mellem of situations that might be considered worthy of an OIC: You're 70 and paying your debt means seriously depleting the nest egg you're living on, or you're widowed and the tax bill was racked up by your now-deceased spouse.

(For more information on OICs, click here.)  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.