I CAN'T PAY MY TAX BILL. NOW WHAT?

I hope that you can help me. I have not filed my tax return and I do not have enough money to pay. What are the penalties? Am I going to jail?

Carrie

Carrie, I am sorry about your problem. Don't worry, you are not going to jail. You should consider requesting a payment plan from the IRS. There is a hefty interest rate, but no penalties.

There are penalties if you do not file your return and pay the tax by the due date. Here is what you need to know about failure-to-file and failure-to-pay penalties.

1. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.

2. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of the taxpayer’s unpaid taxes. As you can see, this is a rate that is only charged by the Soprano's. A bank loan is much cheaper.

3. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

4. You will not have to pay a failure-to-file penalty if you can show that you failed to file on time because of reasonable cause and not because of willful neglect.

5. In addition to the penalties above, you will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.

6. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

So the answer is, round up as much money as you can because the penalties are huge and non-deductible. In addition, you need to start thinking about 2009 tax. You do not want to end up in the same situation at the end of this year.

Larry Kopsa CPA