If you aren’t getting money back from the IRS this year, chances are you owe and are in the process of getting everything together to send on or just before April 15th. If you are worried about being able to pay that tax bill, here’s some advice from Jason Silverman of “Practical Money Matters for Life” – Don’t panic!
You can avoid penalties by acting quickly and asking for an extension before April 17th. By not filing your 2011 federal tax return 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.
Here are ways to help avoid penalties:
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.
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.
- Payment Options for an IRS Offer in Compromise Agreement (taxdebthelp.com)
- Offer in Compromise FAQs (taxdebthelp.com)