If you simply can’t afford to pay your tax bill, you have a few options:

• You can pay the IRS late. The monthly late fee is 1% of the balance due, $10 on a $1,000 tax balance.
• You can set up an with the IRS for a one-time fee of up to $105 and monthly interest.
• Or, you can pay by credit card. Before you use credit to foot your tax bill, make sure you understand the advantages and disadvantages of paying your taxes this way.

Benefits of paying with a credit card:

You can earn rewards when you use a rewards credit card . Watch out, some rewards credit cards have restrictions on the type of purchases and minimum charges before they start rewarding you.

You’ll have more time to pay your tax bill without filing extra forms. Putting your taxes on your credit card lets you repay your taxes beyond the April 15 deadline. The IRS has this option, too, but requires you to file additional forms.

Drawbacks of paying with credit:

You’ll pay interest on the tax you owe. The longer you take to pay your credit card balance, the more you’ll end up paying in interest.

There are convenience fees. Not only is there interest rate on your credit card, but also convenience fee that’s 2.49% of your tax bill. Putting a $10,000 tax bill on your credit card will cost $250.

You can’t bankrupt the debt. Income tax is one of the types of debt you can’t bankrupt (along with child support and alimony). So, if you have financial trouble later down the road, be aware that bankruptcy won’t discharge credit card debt incurred from taxes.

LaToya Irby, About.com

From J.K. LASSER WEB page 

Beware of Credit Card Settlements 

If you have a high outstanding balance on your credit card, you may be able to negotiate with the credit card company for a reduced settlement. While such a settlement can save you thousands of dollars in interest and help to restore your credit rating, it can cost you tax dollars.  

How a settlement works 

Say you owe $20,000 to a major credit card company. It may agree to accept $5,000 as a full settlement of the account balance. Once you make this payment, the company will issue you a Form 1099-C reporting the amount you didn’t have to pay as “discharge of indebtedness income.” This income usually is taxable to you.  

In one recent Tax Court case, a couple who negotiated just such a settlement with MBNA argued that the arrangement did not produce any income; it was merely a retroactive reduction in the interest charged. They analogized it to the situation where a property seller who gives seller financing later reduces the outstanding balance; this is treated as a reduction in the purchase price.  

The court, however, explained the difference here. The parties to a credit card are that of debtor and creditor; there is no sale of property. Thus, any reduction in the outstanding balance is a discharge of indebtedness.  

Exceptions to recognizing income 

Discharge of indebtedness income for personal credit card debt (called “nonbusiness debt”) does not have to be recognized if the debtor is:  

·         Bankrupt (Title 11).  

·         Insolvent (current liabilities exceed current assets).