NEW YORK — There are many reasons to hate tax time, but here's one of the worst: You discover while doing your taxes that you owe far more than you can possibly come up with by April 15.
Cry, scream, punch the wall if you have to. But then deal with the problem head on.
Here's what to do:
File for an extension
If you won't be ready to send in your return by April 15, file for a six-month extension, using Form 4868. It's automatic. And so long as you pay at least 90 percent of the taxes you owe (guessing is fine!), you won't owe a late-payment penalty. This also gives you time, if you're still doing your taxes at the last minute, to correct any errors you may find on, say, a 1099 form from your broker.
But if you can't pay at all, it's best to go to step 2 and work out a deal.
"Some people will file the return, and not attach any payment, and wait for the IRS to come to them," says David Kautter, managing director of the Kogod Tax Center at American University in Washington. "You can do that, but the interest and penalties will start to run."
Weigh your payment options
You may be able to borrow on your home equity, or put the bill on your credit card, or you can set up an installment plan with the IRS.
It all depends on what you'll pay with the options available to you. With interest rates low, the average rate for a $30,000 home equity line of credit is 5 percent, according to Bankrate.com. If you have access to one, that may be your best option.
The average credit card rate nationally is just under 15 percent, according to CreditCards.com, and the average for those with bad credit is a whopping 23.6 percent. There's also an added "convenience fee" for paying your taxes by credit card (since the IRS is prohibited from paying the credit-card fees that retailers do). The fee varies by card but could add an extra 2 percent to your bill. Those numbers should make you think twice about putting your taxes on your Visa or Mastercard.
Set up an installment plan
By comparison, a tax installment payment plan will run you around 6 percent a year.
To set up an installment plan, file Form 9465 or simply file an online request at http://www.irs.gov/Individuals/Online-Payment-Agreement-Application.
You'll pay an application fee of $43 to $105, depending on your income level and whether you'll pay electronically. And then you'll pay off that tax debt in monthly installments.
But setting up an installment plan, you'll cut the penalty on unpaid tax in half, to 0.25 percent per month, though the interest due remains the same.
If you owe less than $50,000, it's pretty much automatic - and you can set up an installment plan from the privacy of your home online. Says Kautter, "There's no need to call or write or visit the IRS."
Pay your penalties
If you ignore the problem, you'll end up owing more, and eventually you'll have to pay up. The IRS assesses separate penalties for not filing and for not paying on time, as well as charging interest on the taxes owed, currently at a rate around 3 percent a year.
The failure-to-file penalty generally runs 5 percent for every month your return is late, up to 25 percent (with a minimum penalty of $135). If you owe $10,000 and don't pay till September, tack on an extra $2,500 to your bill.
The failure-to-pay penalty is just a fraction of that, at 0.5 percent per month of the unpaid tax, and that rate can be cut in half by setting up an installment plan. For that same $10,000 non-filer, the penalty on the money that is owed would be $250 for those same five months.