Dear IRS, I Can't Pay

This is absolutely no excuse for not filing or failing to get an extension.

• If you file by April 15 but can't pay, you should arrange for an installment agreement.

• If you are not ready to file, just send in Form 4868 on or before the magic date.

Either way, you'll successfully eliminate the expensive 5% per month "failure-to-file" penalty — even though you didn't pay on time. However, the government will charge you interest at a much more reasonable rate until you pay up. (The interest rate can increase or decrease on a quarterly basis.)

If you go the extension route, you must file your return no later than Oct.15. If you know right now you still won't have gathered together what you owe, relax. You can still arrange for installment payments when you file.

If you fail to file or extend, you'll be charged the failure-to-file penalty until it hits 25% of what you owe. For example, if your unpaid balance on April 15 is $5,000, your monthly failure-to-file penalties of $250 until you "max out" at $1,250. After that, you'll be charged interest until you settle your account

Installment Agreement
When do I have to come up with the balance due? The general answer is as soon as possible, so you can halt the IRS interest charges.

Alternatively, you can usually arrange to borrow from the IRS by requesting permission to make installment payments on your tax bill. Do this by filing Form 9465 (Installment Agreement Request) with your tax return — either on April 15 or by Oct. 15 if you extend.

Form 9465 is simple. You suggest your own terms. For example, if you owe $2,000, you might offer to pay $100 on the first of each month. Approval is generally automatic if you owe $10,000 or less and propose a repayment period of 36 months or less. You should get an official answer within 30 days of filing Form 9465. On approval, you'll be charged a $105 "setup fee" (or $52 if you arrange for automatic withdrawals from your bank account).

For higher amounts or longer repayment periods, the IRS may require some financial information, but the agency has generally been quite reasonable in these circumstances.

As long as you have an unpaid balance, you'll be charged interest, but this is often much lower than you could arrange with a commercial lender.

Warning: When you enter into an installment agreement, you must pledge to stay current on your future taxes. The government is willing to help with your 2008 liability, but it won't agree to defer payments for later years while you're paying the 2008 tab. For example, if you are still paying off your 2007 tax bills, forget about an installment deal for 2008.

Paying With a Credit Card
As you probably know, you can pay your tax bill with Visa, MasterCard, Discover or American Express. But before you pursue this option, make sure to ask what kind of one-time fee your credit card company will charge and the interest rate. You may find the IRS installment payment program is a better deal.

Short-Term Solution
Maybe the reason you can't pay is strictly because of a short-term cash crunch. If that's your story, file by April 15 and pay what you can. The IRS will bill you for the balance. That should take at least 30-60 days. Then pay when you get the notice. You'll be charged interest.