extensions. “Generally, you can contribute up to approximately 13% of your self-employment income to a SEP each year,” says Torella. “The current maximum is $24,000.”
Borrow some breathing room
Great, you say. You can cut your 1998 income by up to $24,000, which would cut your tax bill.
All you have to do is find the $24,000! If you had $24,000, you wouldn’t be worrying.
Well, that’s what lenders are for. You can borrow money to pay the IRS or borrow money to make de- ductible contributions to a retirement plan. “Your best choice may be to draw against a home equity line of credit,” says Bailey. “On such loans up to $100,000 of the interest will be deductible, no matter how you spend the money.” Typically, home equity lines of credit are relatively inexpensive, with current rates ranging around 6%-7%.
“Even if you can’t tap a home equity loan, it still makes sense to borrow to pay the IRS,” says Donald Carroll Moragne, a former IRS agent and manager who now heads the Tax Zone, a Silver Spring, Maryland, firm specializing in resolving IRS disputes.
“When you owe the IRS, the debt builds up rapidly.” You’ll owe interest on late tax payments, which now runs around 8% per year, as well as a penalty for late payments of 0.5% per month (6% per year). There may be other penalties, too, that will increase your debt burden, so you’ll probably find it cheaper to pay back your local bank or your Uncle Harold.
Make a deal
Unfortunately, many sole proprietors already have tapped friends, relatives and credit card companies to the max. If you’re in that position with no borrowing power to your name, don’t despair. It’s possible to negotiate payment terms with the IRS, as long as you know how to do it.
“The first step,” says Wi
llock, “is to be sure to file your 1998 tax return on time, or ask for an automatic filing extension. The penalties for late filing are 5% per month, up to 25%, which you certainly will want to avoid.”
“A lot of people don’t do anything if they can’t pay, which is a serious error,” says Torella. “Sooner or later, the IRS will catch up with you, and the bill likely will be much higher than if you had come forward right away.”
Remember even if you can’t pay on time, you must file on time. You can file your 1998 return, write $500 or $50,000 or whatever on the line that says “taxes due,” but send in little or even no money with your return. “When you file in this manner,” says Willock, “you can attach Form 9465, an installment payment request. On this form, you can propose a schedule for paying the IRS what you owe.” If you owe $12,000, for example, you might propose paying $1,000 per month for 12 months, plus interest. “The IRS will occasionally, although rarely, waive penalties if you file on time and show good faith,” says Willock.
What if you have some cash on hand