Individuals may have more difficulty paying their taxes on April 17th as compared to previous years. This year, the first tax payment is due for converting your traditional IRA into a Roth. You may have also cashed out your 401K or other retirement account early because you were strapped for cash. Don’t panic, there are steps you can take to reduce penalties and maintain good standing with the tax authorities.
Can I just file a tax extension and pay later?
No, one of the biggest misconceptions is that you can file a tax extension or Form 4868 and you’re off the hook for taxes. April 17th, 2012 is the deadline for filing your return and paying any taxes owed to the IRS. If you don’t file your tax return or an extension, the IRS charges a late-filing penalty, normally five percent per month based on the unpaid balance. Numerically this would mean a taxpayer with a $5,000 unpaid tax liability that doesn’t file a return or extension, will be subject to $250 of additional interest each month or $3,000 for an entire year of unpaid taxes.
If you do plan to file an extension, please note that the late payment penalty does not apply during the six-month extension period if you paid at least 90% of your actual tax liability by the April 17 due date. So, if you do file an extension try to pay at least 90% of your estimated tax liability.
What should I do if I can’t pay?
You should still file your tax return by the April 17th due date or file for an extension and pay as much of the tax liability as possible. You will owe 0.5% a month for the unpaid balance, up to 25% of the balance which is much less of a penalty than the 5% per month for failing to file. Within 45 to 60 days after filing, the IRS will send you a tax bill for the remaining balance. If you need much more time to pay your tax bill, it is worth exploring one of several relief programs that the IRS offers.
Most taxpayers can set up a payment agreement with the IRS online. Those who owe $50,000 or less in combined tax, penalties and interest can set up a monthly payment agreement online for up to six years. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. Taxpayers can also request a payment agreement by filing Form 9465-FS.
What if I’m unemployed or I own my own business?
Unemployed tax-filers and self-employed individuals facing financial difficulties can apply for a six-month extension or grace period to pay their tax liability. For unemployed filers, they must have been without a job for at least 30 consecutive days during 2011 or through April 17, 2012. For self-employed filer, they must have experienced at least a 25% decrease in business income during that same period as a result of a poor economy. These taxpayers will not be charged a late-payment penalty if they pay any tax, penalty and interest due by Oct. 15, 2012. Please note that there are income limitations of $100,000 for single filers and $200,000 for married couples filing jointly. Taxypayers will need to complete federal form 1127A to apply for the relief.
More Tax Questions? Browse answers or ask your tax relief questions online.
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