If you're worried you won't be able to pay your income taxes by this year's April 17 filing date, don't panic; but don't ignore the deadline and certainly don't wait for the IRS to reach out to you first. Acting quickly not only gives you more repayment options, it can also significantly lower penalties you might owe the government.
By not filing your 2011 federal tax return or asking for an extension by April 17, 2012, the penalty on any taxes you owe increases dramatically – usually an additional 5 percent of taxes owed for each full or partial month you're late, plus interest, up to a maximum penalty of 25 percent. But file your return/extension on time and the penalty drops tenfold to 0.5 percent.
Eventually, the IRS could even place a tax lien on your assets and future earnings.
The IRS recently announced that they're offering a six-month grace period for failure-to-pay penalties for certain wage earners who have experienced long periods of unemployment; or, if self-employed, experienced a 25 percent or greater reduction in business income in 2011 due to the economy. Here's how it works:
- You must have been unemployed for 30 consecutive days or longer in 2011 (or in 2012 up through April 17).
- Your adjusted gross income cannot exceed $200,000 if married and filing jointly ($100,000 if single or head of household).
- You cannot owe more than $50,000 in 2011 taxes.
- To get the six-month penalty-free payment extension, you must pay all taxes, interest and other penalties by October 15, 2012.
- The failure-to-pay penalty amounts being waived are the same as described above (5 percent per month if you miss the filing deadline or 0.5 percent if you file by April 17 – both up to a maximum 25 percent penalty). However, the IRS is still legally required to charge interest on unpaid back taxes, as outline above.
- If you meet the penalty-waiver eligibility criteria, you must complete and submit IRS Form 1127-A by April 17. (Note: Don't submit with your tax return; separate mailing instructions are found on the form.)
IRS tax repayment alternatives include:
Pay by credit card. You likely will be charged a small fee that is tax-deductible if you itemize expenses. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty.
Short-term extension. If you can pay the full amount within 120 days, call the IRS at 800-829-1040 and ask whether you qualify for a short-term extension. If granted, you'll still owe interest but will avoid an application fee.
Installment agreement. If you need longer than 120 days, an installment agreement will let you pay your bill in monthly installments for up to six years. Penalties are reduced to 0.25 percent a month, although interest continues to accrue on outstanding balances. If you owe $10,000 or less, you're guaranteed an installment agreement provided you have filed and paid all taxes for the previous five years and haven't had an installment agreement within that time.
Also new this year is that the IRS has doubled the threshold to qualify for a streamlined installment agreement, which means you don't have to supply a detailed financial statement with your application. If you owe $50,000 or less and are in good standing, you're likely to qualify – that's double the previous $25,000 threshold. Also, the maximum term for streamlined installment agreements has been raised from 60 to 72 months.
If you owe more than $50,000 you still may qualify, but may be required to file a detailed Collection Information Statement.
There's a $105 fee to enter an installment agreement. It's reduced to $52 if you set up a direct debit installment plan (or $43 for low-income filers). For rules and to apply, see the "Online Payment Agreement Application" at www.irs.gov or submit IRS Form 9465.
Offer in Compromise. Under certain dire financial-hardship circumstances, the IRS may allow taxpayers with annual incomes of up to $100,000 to negotiate a reduction in the amount they owe through an Offer in Compromise.
To qualify, you must be current with all filing and payment requirements and not in bankruptcy. There is a $150 non-refundable application fee, which may be waived for low-income applicants. You'll also be required to submit an initial payment with your application.
Please note: Only a small number of offers in compromise are accepted and you should only pursue one after having exhausted all other payment options. For step-by-step instructions, read the IRS Form 656 Booklet.
If you're unable to make payments on your installment agreement or offer in compromise, call the IRS immediately for alternative payment options, which could include reducing the monthly payment to reflect your current financial condition.
Nothing beats staying current on your taxes, but if you fear you may fall behind, explore these options before the penalties start snowballing.