Fortunately, you’re not alone. This is a scenario that affects many people and the IRS understands that sometimes reality interferes with your ability to pay. There are options available to you if you are unable to pay and many are quite reasonable. We’ll go through some of the best options if you can’t pay.

Installment Agreement

The IRS offers installment plans that can help you break up what you owe into more manageable payments over time. You can apply online if owe less than $50,000 in combined taxes, penalties, and interest. You specify how much you can pay, how often you can make payments, and specify all that on an application. The IRS will now allow up to 6 years to pay your tax liability if you’re on an installment agreement.  There’s an application fee involved and the interest is manageable (especially since rates are low right now) but the IRS still has to approve your application. Not everyone is approved for this.

The whole process can be completed fairly quickly if you have your Caller ID number (from the top of your tax due notice), adjusted gross income, bank address, and employer address. You will have to pay the aforementioned loan fee, and pay interest, but it’s generally much less than what you would pay if you charged your tax bill to a credit card. Even if you end up with the highest fee schedule and interest, it’ll be much less than most credit card companies, so it’s a better choice than paying with plastic.

If you’re seriously considering this, the fees are $52 for a direct debit agreement ($105 for the standard agreement or payroll deduction). It can be reduced to $43 based on income, that’s the cheapest option. It’s worth noting that many states also have installment payment options that you can take advantage of. Check with your state comptroller’s office, or tax division, and you can find out more about your options.

Request “Additional Time To Pay”

In same cases, if you can describe your situation, and if you are able to pay within 60 to 120 days, you might be able to get a little more time to make your tax payment. Call 800.829.1040 to speak to someone about this option or apply through the Online Payment Agreement application. If you can pay your tax in full within a relatively short period of time, there is a chance that you can pay less in interest and penalties.

Do not confuse this option with an “extension,” which is simply a request for additional time to file your return. Those who request an extension still have to pay any tax liability on tax day, they don’t get additional time to pay their taxes.

Offer in Compromise

You can actually offer to settle your tax obligation with the IRS by paying a percentage of what you owe. If you are having trouble paying due to income or other problems, the IRS might accept an Offer in Compromise.  The IRS usually only accepts if the offer is reasonable – and if the likelihood of collecting the whole amount in a “reasonable” period of time is rather slim.

The IRS is more flexible than you might think, as long as you are willing to meet your obligation, and can show that you need the help. Contact the IRS to work out an arrangement that makes paying your taxes a little more manageable.

If you have questions, don’t forget TurboTax has CPAs, IRS enrolled agents, and tax attorneys available to answer your questions year round.

Ask for additional time to pay: It’s nearly that easy. You can request an additional 60 to 120 days to pay what you owe. You can call the IRS or go to the Online Payment Agreement and submit your information. This is a good solution if you have a first quarter bonus coming in or just needed time to rearrange some of your assets to free up the cash.

Apply for the Installment Plan: You can use this option to pay off a tax debt of up to $25,000 over as long as 60 months. You can use the same Online Payment Agreement link or apply by using Form 9465. Your application is subject to approval but it’s guaranteed if the amount owed is not over $10,000, you have a clean record for the prior five years (all taxes paid with or prior to the return due date), you agree to pay it in full within three years, and the IRS determines you can’t pay in full immediately.

Pay by credit card or debit card: Since the penalty can be as much as 1/2%/mo and interest is currently 4% annually, you may have a credit card that offers a lower rate, perhaps even a zero percent teaser rate for a year. With average credit card rates still at 14% in addition to the 2%+ fee from the card service provider, the IRS route still seems best in most cases. The fee to pay with a debit card is less than $4, but if you have the cash to debit, why not just cut the check?

401(k) loan: The rules for these loans allow you to borrow up to 50% of your vested balance for five years. The current rate (based on the common “Prime+1/2%) is about 3.75%. There are risks, however. Should you lose your job, your loan balance is subtracted from your account and the amount is deemed as distributed. Taxes and 10% penalty are then due which results in yet another debt to the IRS.

The IRA shuffle: You can’t borrow from your IRA, but did you know that if you wish to transfer the funds from one account to another, you have 60 days to do this? In effect, this is the same as a 60 day loan. So long as the money is deposited into a different account on or before day day 60, there’s no tax or penalty. You should only consider this option if you are certain of having the money within the 60 days, otherwise, there’s a high price to pay, both tax and a 10% penalty.

HELOC: The home equity line of credit is to be used as a last resort, it puts your house at risk if you default. With most HELOCs tied to the Prime Rate plus a bit of an adder the rate will be in the 4%-5% range. Not a bad cost to borrow and you avoid any penalty. If you choose this type of loan, try to pay it off quickly, the bill’s minimum payment will likely reflect interest only. Don’t let a single year’s tax bill turn into 10 years of payments.

Now that you’ve decided how to pay the tax man, take a look at How to Adjust Your Tax Withholding for the New Year. Understanding and making changes to your withholding this year will prevent you from owing so much in April 2012.

Window Tax

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The income tax may be the most common form of taxation today, but it wasn’t always. In 1696, King William III of England introduced a “window tax” instead of the controversial income tax. Each household had to pay two shillings per year by default, and the more windows you had, the more you paid on top of that amount. (Evidence of window taxes can be found in the National Archives of Scotland as well.)

The extra tax rates took effect if you had more than ten windows, and an even higher one kicked in if you had over twenty. Although the king believed this would cause less resentment than an income tax, the citizens despised it, likening it to a tax on sunshine and air. Many responded by boarding or bricking up windows in unused rooms to avoid being targeted by the tax, which was finally taken off the books in 1851.

Beard Tax

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Comical as it may sound, there have actually been several leaders throughout history who taxed facial hair. King Henry VIII of England, in a true act of hypocrisy, taxed everyone who wore beards in 1533 while defiantly continuing to wear his own. His daughter, Elizabeth 1, later re-introduced the same tax. Tsar Peter 1 levied a similar tax on Russian citizens in 1705, forbidding anyone to wear a beard unless a tax was paid.

The penalty for those who kept their beards without paying: carrying around a sign that said “beards are a superfluous burden”, according to Pavel Florensky in his book The Pillar And Ground Of The Truth.

Hearth Tax

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Tax compliance was as much a concern in 17th century England as it is in 21st century America. In order to simplify things, King Charles II imposed a “hearth tax” in 1662. The reason? It was easier to count immovable stone hearths than human beings (who tend to evade being counted or taxed when possible.) The actual tax (discussed at length in Robert Fossier’s The Cambridge Illustrated History of the Middle Ages) amounted to two shillings per hearth, per year.

This tax was also offensive because it permitted tax officials to enter homes unannounced and inspect the number of hearths. Much like the window tax, citizens responded by clogging their chimneys, effectively rendering their hearths unusable and avoiding the taxes levied on them.

Freedom Tax

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Slavery in America is widely viewed as a black mark on the nation’s history. In Ancient Rome, however, it was a completely accepted and mainstream practice. Slaves were sometimes freed by their owners after working a set number of years, and even had the opportunity to work for others on the side and buy their freedom that way.

But slave owners weren’t the only ones who needed to be paid. The Roman government also demanded of any freed slave a 10% tax (on top of whatever they paid their owner) in exchange for their newfound freedom, according to The World Of The Citizen In Republican Rome.

Urine Tax

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No, this isn’t a late April Fool’s joke. Way back in 1st Century Rome, there was actually a government-sanctioned tax on urine. While privileged Romans had their own sewage systems, commoners had to empty chamber pots into disgusting cess pits on the street. Their bodily refuse, in turn, was then collected and used for industrial purposes around Rome.

What industrial uses could urine possible serve, you ask? As it turns out, plenty: tanning leather for one, and also cleaning and whitening togas. Fortunately, this tax was at least levied on the collectors of the urine (not the producers, according to Neatorama.)

Wig & Powder Tax

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Wigs aren’t part of the fashion mainstream anymore (proof that not everything was better in the “good old days.”) Back in the 18th century, though, virtually all men of stature proudly wore powdered wigs as a staple of their daily wardrobe. Hoping to capitalize on this trend, British parliament introduced taxes on wigs and powder in 1795, according to Stephen Dowell’s History of Taxation and Taxes in England from the Earliest Times to the Year 1885.

In practical terms, the tax amounted to what would today be forty euros. Like the hat tax (another unpopular and ill-fated tax of the same era) the wig and powder tax was roundly protested and eventually repealed without much fanfare. Foolish as these taxes sound today, the basic idea – taxing whatever people love to do and are reluctant to stop doing – can be seen time after time in today’s tax code. If you do owe, don’t fret, there are options for paying your Federal taxes.

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