April, 2006 Tax Tip
Get Your Return Filed on Time With or Without Payment!
Here is a† common scenario this time of the year:† Your tax return has been completed, signed, and ready to mail or E-file but you donít have the money to pay all or part of the amount due.† If you can relate to this you have a lot of company, including a number of my clients.† However, not filing the return is not an alternative!
There are two penalties that can apply here.† The failure to file on time penalty is 5% of the balance due each month or part of month that the filing is late.† The failure to pay on time penalty is .5% of the balance due each month or part of month that the tax remains unpaid.† The failure to file penalty is reduced by the amount of the failure to pay penalty for any month.† Therefore, if you do not file on time and also owe tax, the combined penalty is 5% for each month the return is late, up to a maximum of five months, or 25%.† If the tax remains unpaid after five months, the .5% penalty continues to run, up to 25% until the tax is paid.†
Doing the math, the total penalty for failure to file and pay can be as high as 47.5% (22.5% late filing and 25% late payment).† Each penalty can be abated upon a showing of reasonable cause, but know that you are at the mercy of the ultimate judges on the issue of reasonable cause, the IRS (and possibly state taxing authority).
From the above, you can see that it is of the utmost importance to file the return or obtain an automatic extension even if you cannot pay the tax.†
CAUTION:† If you file for an automatic extension (now valid for up to six months), do not understate the liability that you reasonably expect your return will show.† The extension can be viewed as a contract - the IRS will grant you the extension provided you tell them what your liability will be.† If you donít keep your end of the bargain, they have the authority to retroactively invalidate your extension.† This means you will owe late filing penalties as well as late payment penalties.† Remember, an extension of time to file does not grant you an extension of time to pay the tax.† To avoid late payment penalties, at least 90% of the tax you will ultimately show on your return must be paid by April 17, 2006.
As to paying the tax, you do have alternatives to consider.† If you will have a short-term influx of cash, perhaps you have someone that can loan you the money.† Maybe you can draw on a home equity line of credit.† Also, you can use a bank credit card by contacting a service provider approved by the IRS.† There is normally a service charge of around 2.5%, plus the interest charges if you canít pay the credit card balance.
If the above possibilities will not work for you, request an installment agreement by completing Form 9465 and attaching it to your return.† You will be asked to enter the amount you can pay each month and the date you will pay it.† Pay as much as you can, but not more than you can handle.† If the IRS accepts the agreement (which is virtually automatic if the amount owed is $10,000 or less and it, plus interest and penalties, can be paid off in 36 months) the late payment penalty is reduced to .25% per month.† There is also a $43 processing fee that will be taken from your first payment.†
Be sure you are current on all payments, or the IRS can nullify the agreement.† The best way to make certain you are current is to have the IRS withdraw the amount from your account each month on the due date.† Note:† If the tax owed is $25,000 or less, you can usually obtain a streamlined installment agreement for up to five years.† Neither the three-year nor the five-year agreements require a financial statement.
An important question to ask yourself if you are in this position is how can I avoid this from happening in the future?† Increasing withholding or making quarterly estimated tax payments are two possible options.
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