TIPS FOR THOSE WHO CAN’T PAY THEIR TAXES

By Kathleen Pender

April 14th, 2009

Can't pay your taxes? You've got company.

Because of the bad economy, more people are finding themselves unable to pay their tax bill by April 15th,
2009 for the first time.

"We have seen a 300 percent increase in rookie delinquent taxpayers," this year compared to the same
period last year, says Richard Boggs, chief executive of Nationwide Tax Relief, a firm that helps people in
tax trouble.

Boggs says many of these people lost their jobs. To make ends meet, they took money out of a retirement
plan or sold an asset and did not have enough withheld to pay taxes.

If you can't pay your taxes, here are some ways to minimize the damage:
First, be sure to file your federal tax return or request an extension by Wednesday.

The penalty for failing to file is generally bigger than the failure-to-pay penalty, says Richard Pon, a
certified public accountant with Lautze & Lautze.

The failure-to-file penalty is usually 5 percent of the unpaid taxes for each month or partial month a return
is late. The maximum penalty is 25 percent of your tax due. If your return is more than 60 days late, the
minimum penalty is $135, or 100 percent of the balance due, whichever is smaller.

To request an extension, file IRS Form 4868, electronically or by mail. The extension will give you until
Oct. 15 to file your return, but if you don't pay at least 90 percent of your actual tax liability by Wednesday,
you will be subject to a failure-to-pay penalty, but it's usually less onerous than the failure-to-file penalty.
The late-payment penalty is usually 0.5 percent of any tax not paid by Wednesday. It is charged for each
month or partial month the tax remains unpaid. The maximum penalty is 25 percent. You will also owe
interest on the balance at the IRS rate, currently 4 percent per year.

Suppose you owe $1,000 in tax. If you fail to file or request an extension by Wednesday, you will owe $50
for each month you are late. After six months, you will owe $250, because you have hit the maximum - 25
percent of $1,000, Pon says.

If you fail to pay, the penalty is only $5 per month, plus interest. After six months, you will owe $30 in
penalties plus roughly $20 in interest or $50 total.

If you owe both penalties in the same month, the failure-to-file penalty will be reduced by the failure-topay
penalty.

In some cases, it might make sense to borrow money to pay your taxes.

If you can, borrow from friends or family at a low rate. But beware that if you borrow more than $10,000 at
a below-market rate, there could be negative tax consequences.

Tapping a home equity line of credit is another lower-cost option. The interest may be deductible, but if
you don't already have one, you could be out of luck.

Another option is entering into an installment agreement with the IRS, which allows you to pay your debt
over time. There are various types of agreements. To enter any installment agreement, you must pay a fee
of $105. This fee is cut to $52 if you pay by direct debit (or $43 if you qualify as low-income. One
potential downside: The IRS says it "may" file a tax lien if you enter into an installment agreement.
IRS spokesman Jesse Weller says the IRS generally does not file tax liens for streamlined or guaranteed
agreements, but "they may be filed if they will protect the government's interest, such as if a property sale
is imminent."

Even if you don't own real estate, the IRS could file a "general" tax lien, which is a broad lien that
encompasses all of the taxpayer's property or rights to real and personal property, Weller says.

A tax lien can clobber your credit score and it stays on your record longer than other black marks, says
Maxine Sweet, vice president of public education with Experian. It is counted as a "major derogatory,"
along with bankruptcies and foreclosures and collection accounts.

If you do enter an installment agreement, make sure you can stick with it. "The IRS treats you very harshly
if you default on an installment agreement," Boggs says.

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