You've scraped up enough cash for a tank of gas to get to work and earn your daily bread, but when you go to the grocer the cost of that loaf has gone up, too. What should you do when even bare essentials are a stretch, if through some bizarre twist of economics you still owe federal taxes on April 15th? What you shouldn't do is actually just as important to your family's future financial solvency.
Don’t Pay Taxes with High Interest Credit Cards
Are you thinking of tapping that high limit, high interest credit card you have tucked away just for emergencies? Don't do it. The IRS will work out an installment payment plan. Even with interest and penalties you will probably come out far ahead compared to most credit card fees.
Don’t Cash Out Your IRA
What should you do if your income has changed dramatically for the worse and the idea of even modest monthly payments to Uncle Sam would stretch your resources? Do you have a retirement nest egg stashed in an IRA account that you are thinking of drawing down to keep the taxman at bay? STOP! Don't do it. You could lose almost 50% of your savings to additional taxes and penalties incurred by the IRA distribution. You will pay your standard tax rate, plus a penalty of 10% for a traditional IRA and 25% for a SIMPLE IRA.
Although the IRS will forgive the IRA early withdrawal penalty when you cash out to pay federal taxes, the catch is the penalty is only waived if you wait for the IRS to order you to make the withdrawal [IRS Publication 590 Chapter 1]. If you decide that using your retirement is the best way to pay your taxes and cash out early to pay on time, the IRS will apply the penalty.
Reduce your tax liability and preserve more of your hard earned assets. File your tax return first and let the IRS contact you about the underpayment. They will examine your available resources and if they determine your retirement assets are fair game, they will excuse the penalty by issuing a levy, placing a lien on your assets, and supplying paperwork to provide your financial institution at the time of your now penalty free early disbusement.
Reduce Tax Debt by Exploring All Options
Before you commit to a payment plan and start writing checks, be sure you’ve pursued all avenues of tax relief. You may qualify for partial penalty abatement if your income fluctuated over the course of the year. Certain circumstances may allow the IRS to negotiate a tax settlement amount. You might not owe as much as you fear.
Seek Help for Your Tax Problems
As with all tax advice, every situation is different and you should consult a tax advisor, tax consultant, or tax attorney to minimize your tax liability. Many questions can be answered free of charge by contacting the Internal Revenue Service directly. The customer service at the income tax help line has improved dramatically in recent years.
When it comes to taxes owed that you can't afford, research the financial ramifications of all your payment options. Take your time to get educated. You can even file for an extension if necessary. Some options have severe financial consequences that are best avoided. When it comes to tax code, the devil is always in the details.
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