"If at all possible, I would encourage tax payers to find a way to borrow the money, preferably from someone other than the IRS," says Labant. "Maybe you have a 401(k) that allows you to borrow money from it. Some people can borrow money against their life insurance." Even a credit card with a low introductory rate might be a less costly route, she says.
Above all, Labant advises tax payers to carefully weigh the pros and cons of each option to avoid paying costly early withdrawal penalties or high interest rates.
Set up a payment plan. If you can't come up with the funds, a short-term extension gives you an extra 120 days to pay your taxes. But you'll still be assessed the 0.5 percent per-month, failure-to-pay penalty on your unpaid balance and interest, Buchholz says.
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You can also propose a monthly payment schedule or an installment agreement. Labant cautions tax payers to consider the fees when deciding whether to enter into a payment plan, because the IRS charges $105 to initiate the plan. If you're willing to have payments automatically debited from your account each month, that fee comes down to $52, but that's still on top of the failure-to-pay penalty and interest.
Stay in touch. Above all, don't ignore the problem and just hope it goes away. According to Labant, your best bet is to keep the lines of communication open. "Don't hesitate to call the IRS," Labant says. "It's better that they hear from you than you hear from them. Be proactive and show an eagerness to try to work out a payment plan as opposed to waiting until they send you a notice."
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In the wake of the financial crisis, experts say the IRS has been fairly easy to work with, especially for people who are having difficulties paying. "Just try not to panic," Cattran says. "Everyone panics when they get an envelope from the IRS. Just stay in communication and be willing to work with the IRS and generally, they'll be willing to work with you."
Twitter: @mmhandley
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