Updated on February 12, 2010. >
WORRIED THAT YOU don't have enough cash to pay your tax bill this year? Well, the worst thing you can do is miss the deadline while you try to scrounge up the money. Rest assured that if you fail to file on time, Uncle Sam will get very cranky and smack you with combined interest rates and penalties that are along the lines of what you'd expect from, say, Tony Soprano.
A better course of action? Get a loan. And remarkably, Uncle Sam himself may be your best source. Generally speaking, the interest rates charged by the Internal Revenue Service are comparatively low and most people who apply for an IRS loan are granted one.
As Tony might say, here's what you're gonna do. First off, you should still file your 2009 return by April 15. Be sure to include Form 9465 (the Installment Agreement Request) with your return. On that form, you can suggest your own easy payment plan to the IRS. Assuming you owe less than $25,000 and are proposing to pay the total over 60 months or less, it's virtually automatic the IRS will accept. (The exception is when you haven't been current on your tax payment and filing responsibilities during the last five years, in which case the IRS won't agree to a deferred-payment arrangement.)
Of course, paying late is going to cost you something>. When you receive an approval notice (which should happen within 30 days), you'll be charged a one-time $52 setup fee (assuming you agree to automatic payments from your checking account). You'll also be subject to interest charged on your deferred payments (which is currently 4% annually, subject to quarterly adjustments), plus a "failure to pay" penalty of 0.25% a month. Together, those two charges equate to a 7% annual interest rate on your unpaid tax balance.
That may sound like a lot, but it's probably less than what you're paying on your credit cards. (Too many people look at that tax bill and figure they can just slap it on plastic.) Moreover, if you don't file at all, you'll face the outrageously expensive 5%-a-month "failure to file" penalty. It continues to accrue until it equals 25% of your unpaid tax balance. That's an awfully heavy price to pay when you could just apply for a loan.
Keep in mind, if you owe more than $25,000 with your 2009 return or will need more than 60 months to get caught up, the IRS will usually require you to fill out some financial disclosure forms. Still, the agency is generally pretty reasonable about agreeing to installment payment terms you can live with.
Borrowing From Estimated Taxes
If you are one of those lucky people who get to pay the tax man not once but four times a year, you too can borrow from Uncle Sam. As you probably know, estimated payments are the government's way of getting even with people when withholding from their paychecks (if any) doesn't come close to keeping up with what they owe. These are usually people who are one (or more) of the following: self-employed, earning a fair amount or more from taxable investments or taking withdrawals from tax-deferred retirement accounts. (Pay-ins for the 2010 tax year are due on April 15, June 15 and Sept. 15 of 2010 and Jan. 17, 2011.)
So what happens if you can't pay or can only afford a partial payment? To be honest, not much. You're simply charged interest on the shortfall, which currently is 4% annually (subject to quarterly adjustment). The only requirement is that you must catch up on your estimated payment obligations by April 15, 2011. Otherwise, the IRS starts piling a 0.5%-a-month late payment penalty on top of the interest charge.
With an interest rate this low, not> paying your estimated taxes offers a reasonable source for a short-term loan. After all, the interest rate is certainly much lower than what many commercial lenders and credit-card companies charge.