Tax day is only a few days off. So what happens if you find, in this time of financial hardship, that you can’t afford to pay your tax debt? Experts say don’t put off filing.
Higher penalties for late filing
The reason for this is that the Internal Revenue Service penalizes those who don’t file at a higher rate than it penalizes those who don’t pay immediately. The penalty for not filing is 5 percent per month for the first 25 months. For not paying right away, however, the tax bureau charges only 0.5 percent a month.
In either instance, tardy taxpayers will also have to pay 3 percent monthly interest on top of whatever they owe.
According to tax prep giant H&R Block, a taxpayer who files in a timely manner but can’t pay the tax liability of $2,000 until the end of June, will owe $43 in penalties and interest. On the other hand, if that same taxpayer also delays filing until June 30, he or she will have to pay an additional $314.
IRS easier on timely taxpayers
Allison Shipley of PricewaterhouseCoopers said that the IRS is also more responsive to delinquent taxpayers who have been timely in the past:
“That’s a lot of money for late filing. And, in my experience with clients who have had a difference with the IRS, they tend to be more lenient if you’ve always filed your returns on time.”
Explore all options
It is in your interest to pay up at tax time if possible and avoid all penalties. While it is generally a bad idea to pay a tax bill with a credit card, this may be an instance when using a low-interest card could be the most cost-effective method of paying. Loans from family and friends may also be a possibility. Explore your options.
But if you simply can not pay by April 17, there are several options for minimizing your penalties and interest.
Filing an extension
Late-filing penalties can be absolved with a six-month filing extension, Form 4868. If able to pay 90 percent of the tax bill by April 17, the penalty for late payment will also be eliminated. However, interest will be levied on any unpaid portion of the tax debt.
If you do file for an extension and can afford it, it is wise to send an estimated payment on April 17. According to financial expert Clark Howard, the IRS offers free software on its site to assist in making that estimate.
The IRS also offers monthly tax installment payment plans that cut the late payment penalty to 0.25 percent. According to the Chicago Tribune, a tax installment payment plan costs only about 6 percent a year, even with penalties.
Setting up a payment plan requires filing a Form 9465, as well as an application fee that varies between $43 and $105, depending on income level and other factors. The IRS has the option to reject any extension; however, it will nearly always accept them if the tax burden is less than $10,000 and the taxpayer has regularly filed in the past.
Sending a partial payment will at least reduce the amount subject to penalties and interest. The federal tax agency is happy to work with hard-pressed taxpayers and appreciates any effort made toward reducing a tax burden. Also, it does offer some relief for taxpayers with financial hardships. Fresh Start is one such program.