By Jason Alderman
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.
IRS tax repayment alternatives include:
Pay by credit card. You will be charged a small convenience 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, an installment agreement will let you pay your bill in monthly installments for up to five years. 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.
If you owe $25,000 or less and are in good standing, you’ll still likely qualify for a streamlined installment agreement; over $25,000 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.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.