Posted by: John S Kiernan

Tax season is a stressful time for everyone. But it’s especially difficult for those unable to pay the IRS. Fortunately, there are many ways to make an unmanageable federal tax obligation easier to handle without drastically driving up the costs.

The best approach largely depends on the length of time you’ll need to come up with the cash due to Uncle Sam. As you’ll see below, the options for people with short-term cash-flow issues are far more attractive than those available to folks with more fundamental financial difficulties. Read on to learn more.

1. Tips for Everyone
2. If You Need Up To 30 Days
3. If You Need 31 – 120 Days
4. If You Need 121+ Days
5. Ask The Experts

Tips fro Everyone

• Don’t try to hide: You’re simply not going to slip through the cracks. And the IRS has proven far more willing to work with people who are straightforward about their inability to meet tax obligations. So submit your return by the April 18 deadline even if you don’t have the money to pay and open a dialogue with the IRS regarding your status.

• File a Return No Matter What: The IRS charges two different fees for failing to pay taxes and failing to file a tax return. At minimum, you want to avoid the latter if you can help it.

• Leverage Free Advice: You’re already on the right track by researching your options online, and we highly recommend that you continue. For example, many universities have free “tax clinics” staffed by third-year law students. Many experienced accountants and lawyers offer free consultations. And you can get free tax help from IRS-certified volunteers through nationwide programs such as VITA, TCE and AARP Tax Aide.

• Watch Out for Scams: There are plenty of businesses promising miracle fixes to even the most severe tax problems. Be intensely skeptical of these. Make sure to thoroughly research anyone you consider working with before enlisting their services. And remember, if an offer sounds too good to be true, it probably is.

• Reevaluate Withholdings: A large tax bill come April could mean that too little was subtracted from your gross pay during the year. In other words, you were getting a bigger paycheck from your employer in exchange for a higher tax bill when you file your return.

  To fix this, fill out a new Form W-4 to opt for fewer allowances and submit it to your employer. Your paycheck will be smaller, but you’ll be far less likely to have a surprise tax bill, too. You may even get a refund.

• Improve Your Budgeting: Owing money to Uncle Sam underscores the importance of financial planning and a carefully constructed budget. So take this opportunity to cut your spending on everything but the necessities, and keep close track of your performance. This will help you both build positive habits for the future and repay the IRS as quickly as possible.

If You Need Up to 30 Days: Just Wait for a Bill

If a temporary cash-flow interruption is the cause of your inability to pay, you should still file your tax return on time and simply wait to receive a bill from the IRS. They notify people who have tax balances due, including interest and late fees, a few weeks after the April 18 filing deadline. It takes a bit of time to process the initial returns, after all.

The IRS currently charges 0.5% monthly interest on your unpaid tax balance, up to a maximum of 25%, if you do not pay by the deadline. That’s a fairly small price for a bit of extra time. Plus, if you can show cause for your late payment, the charges could be waived.

You should use this strategy only if you literally need two to three extra weeks to pay. It would take the IRS 10 days to process requests for an extension or payment plan, anyway. But it’s best not to get on the agency’s bad side.

That said, it’s worth reiterating the importance of filing a return on time no matter what. If you don’t, that 0.5% monthly late fee skyrockets to 5%. If you don’t file within 60 days, the minimum late-filing penalty will be $205 or your entire tax balance, whichever is less.

If You Need 31 – 120 Days: Apply for an Extension

The IRS offers 120-day payment extensions. You won’t need to apply for an installment agreement, but you will have to pay the late fee of 0.5% per month (up to a maximum of 25%) and interest at an annual rate of around 4%.

Qualifying individuals may be able to get fees and interest waived through the IRS Fresh Start initiative

If You Need 121+ Days: Weigh Your Options

Those who need more than four months have a bevy of strategies from which to choose. Many of these approaches are a bit more extreme than those geared toward people with shorter timeframes, but that is to be expected. The key is to weigh all of these options and choose the course of action that is best for your particular situation.

• Set up an Installment Agreement with the IRS: You can apply for the ability to pay off your tax obligation in 72 monthly payments or fewer. You can do so online if you’ve already filed your tax return or by completing one of two forms, depending on how much you owe. Use Form 433-F if you owe more.

  Bear in mind that there’s a fee for setting up a payment plan. The amount varies based on how you apply (online vs. paper form) as well as your chosen payment method:

  If your income is equal to or less than 250% of the applicable poverty guideline, you can use Form 13844 to request a reduced fee of $43.

  It’s also worth noting that the IRS doesn’t usually attempt collections while an installment agreement application is being considered, when such an agreement is in effect, or for 30 days after an application has been rejected.

• Use a Credit Card: In certain situations, paying off your tax obligation with a credit card can save you money. It also shifts your debt from the IRS to your card’s issuer, which might give you some peace of mind.

  You can learn more from WalletHub’s article on the Pros & Cons of Paying Taxes with a Credit Card.

• Submit an 'Offer in Compromise:' If you can’t afford to pay your full tax bill, if doing so would cause an undue financial hardship, this negotiation instrument will allow you to repay less than you actually owe. However, you will have to pay a $186 application fee and make a sizable up-front payment, unless you meet the IRS's Low Income Certification guidelines (see Section 1 of Form 656).

  You can find instructions for how to apply for an offer in compromise here. But before you apply, it’s a good idea to use the IRS’ limit to how much you can borrow, depending on how much you have invested. But as long as the rate is decent, this could be a good option.

• Use a HELOC: A home equity line of credit (HELOC) could help you pay off your IRS obligations inexpensively, depending on the terms. You can compare HELOC offers on WalletHub to find the best deal.

  But remember that this is a very risky route to take because a failure to repay your HELOC balance could cost you your home.

• Sell Assets: Divesting yourself of certain assets is a straightforward yet potentially painful way to raise money to pay your tax liability. This option should be a last resort.

• Ask to Temporarily Delay Collection: If paying your taxes would prevent you from affording daily necessities such as food and housing, you can ask the IRS to wait until your financial situation improves. You can make this request by calling the IRS at 1-800-829-1040, but we don’t recommend doing so. A temporary collection delay allows the IRS to file a tax lien, which can significantly damage your credit score.

At the end of the day, it’s important to reiterate that trying to hide from the IRS is the worst way to handle an inability to pay. The IRS is much more likely to work with people who are upfront about their situation. And there are indeed a number of ways to buy yourself some extra time without doing too much damage to your bank account.

The exact route you should choose depends on how long it will take to come up with the cash.

Ask The Experts: Tips From Tax Pros & Profs

For additional insight regarding the steps consumers can take if they don't have the funds to pay the IRS, we turned a panel of accounting and tax professors. You can check out their responses to the following questions below.

1. Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation?
2. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations?
3. What tips do you have for people who want to make sure they have enough money to pay their taxes in the future?

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• Kathleen DeLaney Thomas Assistant Professor of Law at University of North Carolina School of Law
• Sarah B. D’Alessandro Visiting Assistant Clinical Professor and Director of the Tax and Transactions Clinic at Albany Law School
• Christine Allie Assistant Professor of Law in the Delaware Law School at Widener University
• Goldburn P. Maynard, Jr. Assistant Professor of Law in the Brandeis School of Law at University of Louisville
• John J. Petosa Professor of Practice in the Whitman School of Management at Syracuse University
• Cynthia Vines Associate Professor in the Von Allmen School of Accountancy at University of Kentucky, Gatton College of Business and Economics
• Pippa Browde Assistant Professor in the Alexander Blewett III School of Law at the University of Montana
• Michelle Lyon Drumbl Associate Clinical Professor of Law and Director of the Tax Clinic, Washington & Lee University School of Law
• Jason Cherubini Assistant Professor of Business Management, Goucher College
• Matthew Fish Assistant Professor of Accounting at University of Wisconsin-Eau Claire
• Len Weld Professor Emeritus at Valdosta State University
• Barry N. Cooper Associate Professor in the Accounting Department at the Borough of Manhattan Community College

Kathleen DeLaney Thomas Assistant Professor of Law at University of North Carolina School of Law Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Taxpayers who lack sufficient funds to pay their tax liability should contact the IRS and try to set up a payment plan. Many taxpayers are eligible for an installment plan, and some payment plans can be set up online. Payment plans can allow taxpayers to reduce or completely avoid penalties and interest on late tax payments. It's important to file an accurate tax return even if the taxpayer lacks sufficient funds to pay, however. The penalties for failure to file are significantly higher than the penalties for failing to pay (with an otherwise accurate tax return). Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? I wouldn't recommend measures like payments with credit cards or out of retirement savings before a taxpayer tried to set up a payment plan with the IRS, which may allow them to avoid costlier measures. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? People who earn wages have the luxury of having most if not all of their taxes paid for them by their employer. Self-employed taxpayers and independent contractors, on the other hand, have to be careful about budgeting for taxes. These taxpayers should be making quarterly estimated tax payments during the year, which should reduce their year-end burden. But unexpected sources of income can still cause tax liabilities that surprise people. The best approach is to consistently budget for taxes as income is earned. For example, it might make sense to put a fixed percentage of income earned into a separate savings account each month. For taxpayers who worry about their ability to estimate taxes, they can always overpay their quarterly estimated taxes and claim a refund at the end of the year. This is essentially an interest-free loan to the government, but some taxpayers prefer overpaying and getting that boost at tax time in the form of a refund. Sarah B. D’Alessandro Visiting Assistant Clinical Professor and Director of the Tax and Transactions Clinic at Albany Law School Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Seek help immediately. Tax debt is one of the worst kinds of debt to carry and the IRS is a formidable creditor with lots of power. Reassess your ability to pay. If you cannot, there are options such as payment plans, settling the debt and asking for a hold on collection activity. Eligibility for these options is dependent upon the facts and circumstances, so not all options will work for everyone. There is actually a lot of information on the IRS website. Do you ever recommend paying your taxes with a credit card? Usually I do not, however because everyone’s situation is different, there are times when paying with a credit card might be the best option. For example, someone who ends up owing taxes and doesn’t have any assets to pay the tax, but has a prior agreement with the IRS that they will stay compliant, might consider borrowing from a credit card to pay the tax. This type of scenario can come up when someone has already settled tax debt with the IRS (a process called offer in compromise) and the settlement is dependent upon that person not failing to pay taxes for a certain number of years after the settlement. In a case like that, it might be better to owe the credit card for one year’s worth of taxes as opposed to owing the IRS for the current year and all the years that would have been settled but for the defaulted offer in compromise. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? Again, everyone’s situation is different, so it depends on the facts and circumstances. Retirement assets provide us with financial security later in life when we are less able and less willing to work for a living. However, if a tax debtor does not pay their taxes, the IRS has a lot of power to reach various types of retirement assets and can seize the funds and apply it to the tax debt. It is possible for certain taxpayers to enter into a payment plan with the IRS and pay the taxes over time and avoid a seizure of reachable retirement funds. One would want to consider the cost of tax debt, namely the penalties, interest and negative affect on credit, and compare this to the lost principal and interest on the retirement account. However, if you don’t have the ability to make a regular monthly payment to pay the debt over time and have no other way to pay the tax, it is unlikely that the IRS would settle the tax or put a hold on collection action, so they could just take the retirement anyway. For those that are already retired and living off their retirement accounts, the IRS is much more lenient with options that allow this type of individual to maintain the account. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? Make sure that you are withholding enough and making estimated tax payments if necessary. This means that you inform your employer of how many exemptions you will likely claim so that the proper amount can be withheld. If you are self-employed you should be budgeting for your tax obligations all year long, not just in April. Additionally, you should investigate the tax consequences of financial decisions you make, such as taking out money from a retirement account before reaching retirement age. For many people, that could result in an additional penalty and may even push them into a higher tax bracket, causing a big bill when taxes come due. You can budget for this or request additional withholding from your withdrawal. Christine Allie Assistant Professor of Law in the Delaware Law School at Widener University Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? It really depends on the individual situation. If a taxpayer is temporarily short on funds but will be able to satisfy his or her obligation within a few months or a year, the taxpayer should pay what they can and communicate with the IRS as to when they will make the remaining payments. Interest and penalties may accrue, but it's best to communicate and arrange a payment plan. If a taxpayer has a limited ability to pay, the taxpayer may want to consider making an Offer in Compromise. Under this program, a qualified taxpayer should file a return by the due date and then make such an offer in compromise after the due date, as an unpaid tax debt is necessary to pursue this route. Interested taxpayers should consult a tax professional to see if they qualify and are advised to utilize this program. Do you ever recommend paying your taxes with a credit card? There are plenty of good reasons to use a credit card to pay your taxes. A credit card may have bonus points, zero or low interest rates, or may provide the taxpayer with more security than providing his or her bank account details. Also, a credit card debt may be easier to discharge in bankruptcy than a tax debt. These benefits, though, must be weighed against any fees charged to use your credit card to make a tax payment, interest charges paid on carried credit card debt versus interest charges charged by the IRS, and personal stress that you might experience in having such credit card debt. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? If you are an employee, setting the right withholding amounts from your paycheck is important. If you have trouble ensuring that you have adequate money to cover a tax obligation, set your withholding amounts slightly higher than your expected tax liability. Many people find it helpful to receive a tax refund during tax season, even if it means that they had a higher amount than necessary withheld during the year. Goldburn P. Maynard, Jr. Assistant Professor of Law in the Brandeis School of Law at University of Louisville Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Contact the IRS as soon as possible. You can negotiate a payment arrangement. This is much preferable than waiting for more draconian actions like wage garnishment. Do you ever recommend paying your taxes with a credit card? I would not. The interest rate the IRS utilizes will generally be lower than the rate of interest on a credit card. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? If you can foresee genuine cash flow concerns, make sure that your employer is withholding enough. It may be worth it to overpay the government if you will not have the funds to cover an underpayment. If it’s too late and you cannot plan ahead, then negotiate with the IRS. If no one is being responsive, then contact the National Taxpayer Advocate. John J. Petosa Professor of Practice in the Whitman School of Management at Syracuse University Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Most importantly, make sure you file even if you can't pay the tax. It isn't a crime if you can't pay, but failing to file carries criminal penalties. Also if you can't pay, the IRS is willing to enter into an installment arrangement with you. I believe if the amount owed is under $10,000, the installment arrangement is automatic. There is a form 9465 that must be completed and either filed with your return or filed afterwards to request the installment. Again it is automatic under $10,000 and over just requires approval from a supervisor. Do you ever recommend paying your taxes with a credit card? I think paying with a credit card is a good idea if you need time to make the payments. However, the credit card interest is often higher than the interest charged by the IRS. In addition, if you are that severe of a financial distress where you are considering filing bankruptcy, credit card debt is able to be discharged in bankruptcy while federal and state tax liens are not. So if you paid your tax debt with the credit card, it could help clear your credit future. If not in financial distress, a credit card can be a good alternative if you want to generate points or miles on your card. However, be warned that the IRS isn't going to lose the credit card fee percentage so when you use a card to pay your debt you will incur an additional fee of anywhere from 2-4%. On larger bills, that can equate to a lot of extra money. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? Only in extreme cases. The problem can be compounding. So you take a loan from your 401K to pay your tax bill, but then you can't pay the funds back in the required 5 years. This then makes the unpaid balance taxable and if you are under 59 1/2 subject to the 10% penalty. In my scenario, you delayed the tax problem and potentially made it worse. It isn't the worst idea if you can pay back the loan, but it is possibly symptomatic of other more severe financial issues. It should be a source of last resort. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? This is a very fact specific question, but in general, plan! See your accountant more than after the end of the year to prepare your taxes. If self-employed, make sure you are making your quarterly estimates. If you have an unusual gain on the sale of property, see your accountant for an estimate of how much will be owed in April and set it aside in a bank account. Most people's tax liability can be planned for. I also encourage my clients to increase or override their wage withholding. So when a married couple is working and both make around $40,000 per year, the tax table used by their employer only knows about one of them making $40,000. When the two incomes are combined, the tax rate is now higher than being in the $40,000 bracket and so, often people are short paid into the system. Overriding the withholding by the amount that is required fixes this. So, for example, if you owe the IRS $5,200 at the end of the year, increasing your withholding by $100 per week would solve the underpayment for the next year. Cynthia Vines Associate Professor in the Von Allmen School of Accountancy at University of Kentucky, Gatton College of Business and Economics Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? The IRS has a program called Offer In Compromise. There is a protocol to follow if pursuing this avenue. The details are given in a booklet titled Offer in compromise Booklet, Form 656-B. This booklet will explain the forms that must be submitted. In addition, the IRS charges a fee for this service that is not refunded if the taxpayer's offer is not accepted. Do you ever recommend paying your taxes with a credit card? Typically, the interest charged on a credit card is less than the interest and penalties charged by the IRS for failure to pay. So, the answer to this question is yes. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? I would put this down as a very last resort. Unless the money is taken out as a loan from the 401(k) (and most plans are very specific as to the reasons for which money may be borrowed), taxpayers may be subject to an additional 10% tax penalty for the tax year the money is withdrawn from the savings account. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? I would recommend that they make sure they are either having an adequate amount withheld or making adequate estimated tax payments. One way this can be accomplished is by reducing the dependency exemptions on the W-4 that they submit to their employer. A taxpayer can also request that their employer withhold an additional amount. Pippa Browde Assistant Professor in the Alexander Blewett III School of Law at the University of Montana Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? You have asked about what a person should do if he cannot pay his tax bill. In sum, an individual can seek collection alternatives with the IRS if she cannot pay her entire tax due on April 15. Tapping into a retirement account or using a credit card to pay an outstanding tax debt may cause more problems than they solve. Going forward, an individual should check on any withholding allowances, if applicable, to ensure proper withholding, and/or make sure proper estimated taxes are paid. An individual taxpayer must file a tax return (usually Form 1040 or 1040EZ) by April 15. The tax shown on the return must be paid on the same day. A taxpayer may ask for, and will always be given, an extension of time to file a return, but there is generally no extension to pay your taxes. It may be useful to understand a little bit of background on what happens procedurally when a taxpayer files a tax return. First, the IRS makes what is called an “assessment,” of tax. The assessment is the legal recording on the government’s books and records that a tax is due and owing. When a taxpayer sends a tax return, the IRS will assess the amount of tax indicated on the return and record the amount of tax as the amount that is due. Often, a taxpayer will have withholding or will have made estimated taxes that cover the tax owed. Withholding is when an employer takes out part of a person’s paycheck for taxes and pays it over to the government. Withholding is a prepayment of tax, because it happens little by little in the year leading up to when the taxes are due. Estimated taxes are made by the taxpayer him or herself (as opposed to the employer who withholds and remits). Estimated taxes are due on a quarterly basis and are the equivalent of withholding for a self-employed person or a person who does independent contractor-type work. If a person does not have enough withholding or didn’t make enough estimated taxes, a taxpayer will have a balance due. Regardless of whether a person pays the tax due, the IRS will assess or record the amount of tax due. If the person pays (or has sufficient withholding or estimated taxes to satisfy the tax due), then the assessment is made and the payment satisfies the amount due. If a person does not pay, for whatever reason, the IRS will impose penalties for failing to timely pay. One of the penalties is a percentage based on the amount of tax that remains unpaid. The percentage increases each month the tax remains unpaid. It’s a small percentage – 0.5% per month, with a maximum of 5%. The penalty structure is set up so that the longer the tax remains unpaid and the greater the tax amount, the greater the penalty amount. There is also a penalty for failure to make estimated tax payments. The federal government, like any other creditor (such as a bank) charges interest on unpaid debts. If a taxpayer owes tax and does not pay on time, the government will charge interest on the tax. Interest starts accruing on an unpaid tax bill starting on April 16. The interest rate is determined by reference to the federal short-term rate – the interest on federal tax debts is the federal short-term interest rate plus three percentage points. It is compounded daily. The current (for April 2016) federal short-term rate is 0.70%, so the applicable interest rate to federal tax debts is 3.7%. So, generally, if a person does not pay his or her tax bill, the government will assert penalties (up to maximum of 5% of the debt if the balance is unpaid for 25) and the unpaid balance, of penalties and tax, will accrue interest at a rate of about 3.7%. The IRS may utilize enforced collection against a taxpayer who has a balance due and has assets. For example, the IRS may levy a taxpayer’s bank account or put a lien on a taxpayer’s home. To avoid enforced collection, a taxpayer who has an outstanding balance due has a couple of options in what the IRS refers to as “collection alternatives.” Collection alternative is a bit of a misnomer, because the government is still getting paid. What is “alternative” about them is that the options reflect a choice of the taxpayer as opposed to the enforced lien or levy by the government. The two main collection alternatives are installment agreements and offers in compromise. In general, an installment agreement is appropriate when a taxpayer will be able to pay a tax debt, but is unable to pay it all at once. The installment agreement is a contract between a taxpayer and the IRS in which the taxpayer promises to pay the debt over a period of time. Interest and penalties will still accrue on the debt, but at a reduced rate. To enter an installment agreement, a taxpayer must submit a request to the IRS and have filed all required tax returns. An offer in compromise, on the other hand, is when a taxpayer is unable to pay the entire balance of a tax debt. The IRS will determine a taxpayer’s “reasonable collection potential,” based on the individual’s income and allowable expenses, and the IRS will accept a partial payment of the collection potential amount in full satisfaction of the debt. Do you ever recommend paying your taxes with a credit card? The government is a creditor just like a bank or credit card; both will charge interest for the use of borrowed money. An individual would want to make a very careful analysis to compare the interest and penalties charged by the government (maximum of 8.7%, as discussed above) as compared to the interest rate charged by a credit card (varies, from 0-percent for special introductory rate for limited period, up to close to 20%). Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? An individual may be tempted to take a loan from a retirement account to pay his or her tax bill. This is generally a very bad idea because taking the loan triggers income tax and early withdrawal penalties. First of all, let’s assume we are dealing with a 401(k) account. 401(k) retirement plans offer the benefit of letting an employee save earnings tax-deferred. That is, no tax is paid on the earnings that are put into the 401(k) account. The amount is placed into an account with the goal of earning money for retirement. The earnings of the account will be taxed at the time of withdrawal, presumably when the owner of the account is retired from his or her employment and is, again, presumably, a lower tax bracket. If money is withdrawn from a 401(k) before the owner attains the age of 59 and ½,, the money is also subject to a 10% early withdrawal penalty. To make this concrete, I’ll give you an example, assuming an individual is subject to a flat tax rate of 25%. Let’s say an individual takes a loan from a 401(k) of $100,000. Immediately, that $100,000 is subject to income tax of 25%. That means $25,000 of the $100,000 must go to pay federal income tax. Furthermore, the $100,000 is subject to a 10% early withdrawal penalty, which is another $10,000. Right away, just from taking the loan, the $100,000 is now only worth $65,000 after taxes and penalties. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? To ensure that an individual doesn’t find himself in the same situation in the future, an individual should double check his or her withholding allowances to make sure enough taxes are being withheld. If an individual is self-employed, he or she should make sure that enough estimated taxes are being paid quarterly. Michelle Lyon Drumbl Associate Clinical Professor of Law and Director of the Tax Clinic, Washington & Lee University School of Law Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? I absolutely agree with your advice that a taxpayer who cannot pay should still file a timely return. In my work as the director of a low-income taxpayer clinic, I have seen many clients who have made this mistake: they were overwhelmed by the fact that they could not pay the balance due, so they did not file the return at all. The failure to file can increase the liability by an additional 4.5% per month (in addition to the .5% monthly failure-to-pay penalty) up to a maximum total of 25% after only 4 months and a day. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? This might be a better option than paying by credit card. However, withdrawing funds from retirement accounts will create additional tax consequences, including potentially a 10% penalty if the taxpayer is younger than 59 1/2 years old and no early distribution exception applies. For most people, setting up an installment agreement is still a better financial move than withdrawing retirement funds. Jason Cherubini Assistant Professor of Business Management, Goucher College Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Taxpayers who are having doubts about their filings or ability to pay as we approach the tax deadline should plan on filing an extension. This does not remove the taxpayer’s liability being due, but will give additional time to work through the filing and see what options are available. If an amount is expected to be due, the taxpayer should pay as much as they are able with their extension, to limit future penalties and interest. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? Due to the tax penalties imposed by the IRS on early disbursement of retirement funds, it is not a good idea to liquidate retirement accounts to satisfy tax obligations. If a taxpayer finds they owe more than they can afford, a negotiated payment plan with the IRS will result in a lower cost than any penalties imposed on the withdrawal. What tips do you have to help people avoid being short the funds necessary to cover their tax payments in the future? Taxpayers should take a few minutes at least once every year to evaluate their tax withholdings and adjust if necessary. I personally suggest a quarterly review to check to see if any changes will impact the tax obligation, so that quarterly payments can be made if necessary. In addition, whenever additional income happens, whether it be from a second job, an inheritance, or side work, the taxpayer should set aside money for the future tax obligation. Matthew Fish Assistant Professor of Accounting at University of Wisconsin-Eau Claire Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Do not delay filing your tax return simply because you do not have the money to pay your tax obligation. Even if you cannot afford to pay the accompanying tax with the submission of your tax return you need to file the return in a timely manner. The IRS will assess a failure to file penalty in addition to the tax you owe if you fail to file. So in the best interest of minimizing the amount you owe the government, file your tax return in a timely manner. There are many things individuals can do to generate the funds necessary to pay an upcoming tax obligation. Most of the suggestions require an individual to roll up their sleeves and swallow their pride, both of which are better alternatives to having the IRS sitting on your shoulders. Here are some suggestions:

• Explore opportunities to work for extra income at your place of employment (overtime pay adds up quickly and can help generate cash to pay off/down the tax obligation);

• Get another job (deliver pizzas at night or on weekends, drive for Uber or Lyft in your spare time, or bag groceries at the local grocery store);

• Sell some of your personal items (look for items you can quickly sell on Ebay or Craigslist to generate cash such as collectibles or hobby equipment you have accumulated);

• Tighten your budget (stop going out to eat, delay vacations, cancel your gym membership, avoid the little luxuries you indulge in like buying overpriced coffee every morning);

• Seek professional advice (look for a reputable CPA in your area to help assess your situation).

Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? This is a very expensive way to satisfy a tax obligation and should only be used after an individual has exhausted the list above and should only be done after seeking professional advice from a qualified professional (CPA). Tapping into the 401(k) triggers early withdrawal penalties if the individual is not of retirement age (59 ½) and the amount withdrawn from the 401(k) is considered taxable income assuming it is not a 401(k) roth. Before tapping a 401(k) to pay tax obligations I would look at alternative forms of financing (home equity loan, personal loan, etc.). What tips do you have for people who want to make sure they have enough money to pay their taxes in the future? Individuals must take responsibility for their financial situation. This involves creating a budget, sticking to the budget, and monitoring their spending. The budget is the cornerstone to understanding why you don’t have enough income for any expense (tax or otherwise). Individuals must educate themselves enough about their past tax returns to understand why they have tax obligations they cannot afford to pay. The easiest thing they can do is meet with a representative of their human resource department (assuming they are an employee and not self-employed) to adjust the amount of income tax that is withheld from their paycheck. Individuals need to be self-disciplined enough to make estimated tax payments if they do not want to adjust the amount of withholding their employer takes from their paycheck. Individuals should also make sure they are leveraging all of the tax saving strategies that are available to them. For example, an individual should plan on making payments for medical related costs (office co-pay, deducible payments, contact lens purchases, etc.) from a health savings account (HSA) or flexible spending account because those purchases are made with dollars that are accumulated on a tax deferred basis and help to reduce the taxable income the individual might have. Len Weld Professor Emeritus at Valdosta State University Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? Don’t ignore paying your taxes, that will only make things worse. The IRS charges penalties and interest for non-payment. The interest varies depending on current market rates. The penalty is 0.5% per month on the amount of tax due on the return. The maximum penalty percent is 25%. The IRS will work with most people who need to have a payment plan; you can even apply online. However, your tax liability can’t be more than $50,000 including penalties and interest. Some fees are charged to set up a deferred payment plan and those vary between $31 and $225, depending on the method of payment. A common misconception is that you can file an extension and put off paying the tax owed. You can submit an extension to file your return, but not to pay the amount owed. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? In general, the answer is no. Withdrawing money from an IRA before age 59 ½ can trigger a 10% penalty tax in addition to income tax owed. Also, a taxpayer who is nearing retirement will probably not be able to replace the amount withdrawn, which will affect retirement income for the rest of their life. Work out a payment plan with the IRS instead of raiding the 401(k). What tips do you have for people who want to make sure they have enough money to pay their taxes in the future? Be certain to have enough money withheld from your paycheck. Most people won’t miss an extra $25 to $50 a month. Learning to live each month with a little less money is easier than finding $2,500 to $5,000 for April 15. Another option is to start a savings account and have money automatically sent to the account. That method lets you earn a little interest on your money each month so you can pay your taxes in April. The danger is raiding that savings account for a vacation or Christmas. Barry N. Cooper Associate Professor in the Accounting Department at the Borough of Manhattan Community College Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation? The IRS has payment plans for those Taxpayers who do not have the funds to pay their tax obligations. They should file their return timely, by 04.18.17, and IRS will send them a bill with a payment obligation schedule. Please check out the details on IRS.gov. Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations? A 401(k) plan is for retirement only and it should be taken out if the taxpayer has a true emergency. If you do borrow from your 401(k), it must be repaid to avoid any penalties on the premature distribution. What tips do you have for people who want to make sure they have enough money to pay their taxes in the future? Taxpayers can change their W-4 (Instructions to employer on Tax Withholding) annually or several times a year. If the withholding does not cover their tax obligations, they should consider filing quarterly estimated tax payments to make up for any tax deficiency. The correct withholding for a taxpayer should be the case that at the end of the year when they file their tax returns, they either breakout even or they get a very small refund; otherwise, the taxpayer is giving the government a free loan.

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