Tax Dilemma: Seven Options If You Can't Pay Your Taxes

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Tax day comes a few days late in 2011 – on April 18 instead of the usual April 15. If you're worried about owing the IRS money this year, that extra weekend offers you a little more time to figure out how you are going to pay what you owe.

Of course, if you can afford to write a check and pay off your tax debt, that's your best bet. But if you don't have the cash available to do that, read on. There are other options. Keep in mind, of course, tax rules change frequently, so talk with your tax preparer or check with the IRS for updates to this information.

Pay…or Else

One of the main reasons it's important to find a way to deal with your tax debt is that if you don't pay what you owe, the IRS may file a Notice of Federal Tax Lien. Tax liens are reported on your credit reports, and they are one of the most negative types of information that can be reported. Your credit score can drop significantly as a result.

[Related: When Will the IRS Place a Tax Lien?]

Even without filing a lien, however, the IRS can take serious enforced collection action, such as taking money from your bank accounts, wages, or other income—or taking other assets. In general, they have many more options available to collect your tax debt than traditional companies to whom you may owe money.

Option #1: Don't File (Bad Choice)

Not filing your tax return because you can't pay what you owe is not a valid option, even though some taxpayers are choosing to go that route.

"We're seeing people who have perfect records (of paying taxes) who aren't even filing because they can't pay," warns Scott Estill, a tax attorney with Estill & Long LLC and the author of Tax This! An insider's Guide to Standing Up to the IRS (8th Edition 2011). There is a thought that if you don't file, you don't have to pay, but that's wrong."

You may have to pay a steep failure-to-file penalty if you don't file your return by the due date (including extensions). The penalty is usually 5% for each month or part of a month that a return is late, up to a total of 25% of the amount not paid by the due date. That means the tax bill you already can't afford to pay becomes that much harder to pay.

Option #2: Charge It! The IRS will accept payments by major credit card (American Express, Discover, MasterCard, or VISA credit card). You can pay by phone, Internet or when e-filing.

The IRS doesn't collect fees for credit card payments, but the companies that process these transactions are allowed to charge a "convenience fee," which ranges from 1.90% – 2.35% of the amount charged. In addition to the convenience fee, you will pay interest on the amount you charge at whatever rate your issuer charges. This can make this a pretty costly option – but at least you won't owe the IRS.

Tip: If your credit card issuer sends you promotional checks, you can use one of these to pay your taxes. You won't receive reward points or other offers, but you won't pay a convenience fee and the interest rate may be lower than your normal interest rate for purchases. Watch out for fees associated with these checks – they can be higher than the convenience fee that would be charged if you use your credit card. If there are fees, ask the issuer whether it will waive them.

[Related: Four Reasons Why You Should Not Use Your Credit Card to Pay Taxes]

Option #3: Use a Personal Loan

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