Tax Advice for When You Can’t Pay or File On Time
Plenty of circumstances can lead to overwhelming tax situations which lead to you not paying your federal tax return on time. Maybe you’re struggling to meet other major expenses, or maybe you’re new to freelancing and didn’t know about quarterly tax requirements.
Whatever the reason, don’t despair if you can’t pay your taxes or file your federal tax return on time because there are avenues you can take to make it right.
The most important factor is to know exactly how much you owe Uncle Sam. The fear factor often means people want to bury their heads in the sand so they don’t have to face their tax burden. While this is a natural response, it’s always better to tackle the situation head-on, since once you know what you owe, you can figure out a manageable plan.
This guide will give you helpful tax advice that applies to the most common scenarios when it comes to late tax payment.
Tax Scenario #1 – You Have the Funds to Pay but You Can’t File On Time
If you can pay your federal tax bill in full by the April deadline, use IRS Form 4868 to mail your estimated payment (it’s wise to estimate a bit more to be safe).
This same form allows you to request a six-month extension for filing your tax forms. Remember that the IRS will charge you increased penalty fees for a second extension, so do your best not to miss this deadline. You can also use e-filing in most circumstances as this way your taxes are filed faster and the software will help prevent any errors.
If you have most of your paperwork ready to file by the mid-April deadline, your second option in this scenario is to file on time and then submit an amended tax return later. Many people end up having to do this anyway, such as when they make errors in their calculations, omit the W2 form, change their filing status or claim additional deductions. Use IRS Form 1040X to amend a 1040, 1040A or 1040EZ.
Tax Scenario #2 – You Will Have the Funds to Pay in Six Months
The standard tax deadline for 2012 is April 17. If you don’t have the funds to pay in full by this date, then mail a partial payment using IRS Form 4868. As mentioned above, this form will allow you to request an extra six months extension for your filing deadline, meaning you will have until October 15 to complete your tax forms and make full payment.
During your six month extension period, it’s advisable to make payment as soon as possible using IRS Form 1040-V. Time matters because penalties apply – the IRS will add a late payment penalty of half a percent per month after the April 17 deadline, so by month two you’d be charged 1% interest. Additionally, there’s a 3% annual interest applied to the amount you have not paid by April.
You might qualify however for a late payment waiver under the IRS’s Fresh Start Initiative (see the below paragraph for more information on this scheme).
Tax Scenario #3 – You Won’t Have the Funds to Pay in Six Months
A more intimidating late federal filing penalty of 5% is levied on those who have a tax balance due after the October 15 extension. If you need more than six months to pay the federal taxes you owe, it’s important to contact the IRS to set up an agreement that allows you to pay with installments. You can even pay off a balance of up to $50,000 over six years if needed, but the main factor is to be pro-active in letting the IRS know about your situation.
The Fresh Start Initiative
The IRS has set up a scheme called the Fresh Start Initiative to help taxpayers who are struggling. This program reduces late payment penalties for taxpayers who enroll in an installment arrangement. It may also offer waiver compromises or tax settlements that let you pay less than what you owe.
The Fresh Start scheme provides tax penalty relief to taxpayers in two categories:
1. Wage earners who have been unemployed for at least 30 consecutive days in 2011 or in 2012 preceding the April 17 deadline.
2. Self-employed workers who had a 25% or greater reduction in business income in 2011 because of the general economic slowdown.
The waiver benefits offered by the Fresh Start program are only available to married couples who are filing jointly, and the balance they owe for 2011 cannot exceed $50,000. It applies to those who have adjusted gross incomes of $200,000 or less, or those with adjusted gross incomes of $100,000 or less. You can request the penalty waiver using IRS Form 1127A.
Conclusion
Paying taxes and filing tax forms can be really stressful, especially when you’re under the added pressure of being unable to meet the usual deadlines. Take comfort however in knowing that as long as you take responsible action as outlined in the scenarios above, you can file or pay your federal tax return late without suffering exorbitant penalties.
About the Author:Bob Goren is an accountant and independent advisor on filing the federal tax return in the US.
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