What if you’re strapped for cash and can’t pay the full amount due at the bottom of your I.R.S. Form 1040?

You can ask the Internal Revenue Service for extra time to pay — and can even apply for an installment plan, to pay off the debt over several years. But it’s questionable whether that’s a smart move.

The government tacks on failure-to-pay penalties, enrollment fees and interest charges that compound monthly, and they can add up to as much as 25 percent of the tax owed. In fact, the I.R.S. itself suggests that it’s often better for filers to pay their balance up front with a cash advance from a credit card or a bank loan, because the repayment amount would be smaller.

It’s not just the penalties that make being indebted to the federal government unattractive, said Jina Etienne, taxation director at the American Institute of Certified Public Accountants. In a worst-case scenario — in which, say, your financial situation worsens and you end up filing for bankruptcy protection — credit card debt may be erased, but federal tax bills generally cannot. If you pay late on your credit card, you’ll probably be charged a late fee. But if you miss an installment owed to the I.R.S., it can trigger “aggressive” collection efforts, like placing a lien on your home or garnishing wages.

“Who has more power?” she asked, the government or your bank?

Shorter extensions from the I.R.S. for smaller amounts may make sense. If you owe, say, $2,000 and you know you will have the money in a month or two, you can ask the I.R.S. for a one-time delay of up to 120 days. There’s no enrollment fee for that arrangement. If you pay by the agreed-upon date and have a valid reason for paying late — like you lost your job, or suffered some other hardship — the agency may waive the penalties and interest. “It doesn’t hurt to ask,” Ms. Etienne said.

The main point to keep in mind is to file your tax return, even if you can’t pay the tax owed (you’ll avoid separate penalties the I.R.S. assesses for not filing). And call the I.R.S. to discuss your situation. Many people are reluctant to do so, Ms. Etienne said, but engaging the agency is always better than ignoring it. “Burying your head in the sand will always make it worse,“ she said.

Have you ever sought an extension to pay your taxes? Would you be comfortable paying the I.R.S. over time?

Article source: http://feeds.nytimes.com/click.phdo?i=853294e056ae002967c4c7a4afba3a6b