By Iris Taylor
Call it tax aftershock.
You filed your return and now you owe the Internal Revenue Service a bundle of money that you don’t have.
You’re panicking because you know if you ignore it, the IRS will get nasty. You’ve heard about the threatening letters, fines, penalties, pay garnishments, liens, property seizures and intimidating appearances in tax court.
Where can you get that money?
First, get some counseling. If you owe a bundle, a credit counselor can analyze your plight and advise the best course of action, said Brad Stroh, co-chief executive officer of Freedom Financial Network LLC in San Mateo, Calif.
Don’t know any locally? Find a counselor from the Better Business Bureau. Advice is free at BBB-member company Clearpoint Financial Solutions in Richmond. “We would be able to help them realign their budget so they can find money they might not know they had,” said Amida Mehta, Clearpoint’s marketing director.
Borrow from your 401(k) plan. It’s fast money, said New York personal finance author Jordan Goodman. Typically, there’s a five-year payback with interest and you can borrow up to $50,000. The drawback: it’s payroll deducted, so you’ll take home less money. “But it gets the IRS off your back,” Goodman said.
Don’t take an early distribution, warned Milwaukee CPA Tracy L. Coenen, a forensic accounting expert. “When money is withdrawn from a retirement account under this circumstance, it is taxed at the taxpayer’s regular federal tax rate. There is also a 10 percent penalty applied to the distribution. In addition, most states impose taxes and penalties on such withdrawals.”
Borrow against your life insurance policy. It’s another source of quick cash, said Goodman, if your policy has a cash value.
Refinance your home. It’s not a fast process and you might pay closing costs, said Jordan. If you take this route, better go to www.bankrate.com and shop around for the best rate and terms.
Sell some assets. It’s a way to raise money if you’re not a homeowner, said Stroh, who suggested eBay.
Borrow from friends and relatives. It’s not the best way to improve a friendship or get closer to a relative, said Goodman. “But obviously, you’ve got to borrow the money from somewhere.”
A properly structured loan can keep the borrower and lender from becoming enemies. CircleLending (www.circlelending.com), a BBB-member company in Waltham, Mass., sets up and services personal loans between family, friends and business associates for $199.
Charge it. “Carefully consider this option before taking it, as the interest you end up paying on the charge can be considerable,” said Alan Kopit, a Cleveland attorney and legal editor of lawyers.com.
Work out a payment plan with the IRS. Ask the IRS for Form 9465, “Installment Agreement Request,” by calling (800) 829-1040 or download it at www.irs.gov. You will pay a $43 setup fee, plus 7 percent interest compounded daily and a penalty of 1 percent of what you owe until it’s paid. You get a say in how much you pay per month, said Stroh. “But the IRS has a bigger say.”
Ask the IRS to forgive some debt. If there is no foreseeable way you can come up with the full amount due and you can prove it, the IRS may accept a fraction of the money. Submit the “Offer in Compromise” Form 656. But don’t get too excited. The process is neither fast nor easy, said Kopit. It could take four to 18 months, if you qualify. Plus there’s a $150 application fee.
Your absolute last resort — bankruptcy. Seek advice before filing, advised Stroh. “There are severe limitations on what IRS debt can and cannot be discharged.”
Whatever you do, don’t ignore the debt. The interest and penalties keep accruing until you pay up.
“The IRS is probably the worst collector to deal with,” said Stroh. “It is very aggressive and it has full information about you. You can’t hide anything. It’s a liability that’s not going to disappear. So, you want to pay it off very quickly.”