Avoid Trouble With The IRS (written November, 2014)
What if you don’t have enough money to pay your taxes? You’ve finally finished filling out the myriad of forms that make up that dreaded packet called, “The Tax Return.” You wish you’d followed the advice you’d read to set aside money for taxes when you took money from your retirement account and earned that $6,000 doing freelance work. Your tax forms clearly show that you owe and your depleted bank account is of no help. Now what?
File your taxes on time – every time! The crucial thing to remember about taxes is that even if you don’t have the money to pay them, your return should be filed on time. The penalty for not filing your tax return on time is 5% a month, whereas the penalty for not paying your taxes on time is only ½ of 1% per month. Never delay filing your return because you don’t have enough money to pay your taxes.
Ask for an extension. Each year, more than 5 million taxpayers file Form 4868, asking the IRS for an extension. However this is an extension of time to file your tax return, not an extension of time to pay any taxes due. As long as you send it in by April 15, Form 4868 is an automatic extension, giving you more time to gather together your current year’s receipts and present the information correctly on your tax forms. Anyone can ask for an extension. There’s no need to have an excuse for waiting to send in your return. If you file an extension on April 15, the IRS asks that you give a good faith estimate of the amount you expect to owe and pay whatever you can at that time. Interest and late payment penalties will be added to any additional amount due. For that reason, it’s best to send as much as you can as soon as you can to avoid or lessen extra charges.
Pay Installments. In recent years the IRS has made it easier to pay your taxes by allowing installment payments. If you need to come up with the money to pay your taxes, Form 9465 (Installment Agreement Request) should be filed with your Federal return. You’ll indicate on this form how much you can afford to send each month and on what day you want to pay it. There is about a $45 charge to set up the installment plan. If you’re on an installment plan and you’re late making any of your monthly payments, the total amount you owe will immediately become due. Even with an installment agreement, interest and penalties (for not paying on time) will continue to accrue until you’ve paid off your tax liability. The penalty is the same ½% per month mentioned previously; plus the interest changed from quarter to quarter and is currently 7% per year on the unpaid balance.
Try to settle your bill. If you owe so much that you can’t possibly ever pay it off, the IRS may accept an Offer in Compromise, which means that you offer to pay a lesser amount than you owe in order to settle the bill immediately. You need to fill out a complete financial statement and present it with the appropriate paperwork. Your offer will be accepted only if the IRS believes it will not be able to collect the full amount due from you within the near future. A tax professional can tell you more about the requirements for an Offer in Compromise, as well as discuss with you whether your tax bill is one than can be discharged through bankruptcy. Whatever method you use to pay your taxes, the IRS will require that you remain up to date with your current tax liabilities. You’ll be glad too next year when that pre-planning has kept you from being in this situation again.
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