Generally, April 15th is the deadline for most people to file their individual income tax returns and pay any tax due. If you owe any tax, penalties or interest, you’ll receive a bill which you’re responsible for paying.Read More
All too often, the April 15 Federal tax return deadline arrives sooner than expected – causing frustration and anxiety as you scramble to get everything together at the last minute. Yes, a six-month extension is available from the Internal Revenue Service which defers your tax return filing deadline until October 15. However, taxpayers will still be responsible for paying late penalties on the unpaid tax that was due earlier in the year as well as any unpaid taxes from prior years. The bottom line is, extension or not, failure to file and pay your taxes on time can be a very costly decision!
Filing on Time
If you fail to file your tax return by the April 15 deadline or request an extension, you will be assessed a penalty. For every month or fraction of a month your tax return is late, you will be charged 5% of the net amount that you owe for the year. The maximum penalty you can be charged is 25% of the amount owed. At 5% per month, the maximum penalty would be reached after 4 months. If you filed within the original or deferred tax deadline, there would be no late filing penalty. But let’s say you filed seven months past the deferred deadline and owed a tax bill of $50,000. You would end up having to pay a penalty of 25%, or $12,500, in addition to the $50,000 you already owed. That’s no small chunk of change! And that's just the federal penalty. Individual states also charge late filing penalties of their own, and some can be higher (as a percentage of tax due) than the federal penalty.
Paying on Time
Section 6651(a)(2) of the tax code specifies the deadline to actually pay your tax liability due for the year. If you fail to pay the balance owed for the year, you will be subject to a penalty of 0.5% for every month or fraction of a month that the tax payment is outstanding. The total penalty is capped at 25% of the total tax due but that penalty will keep mounting every month until you reach the maximum penalty (in about 50 months). Since there is no deferment for paying your tax bill after April 15, it is advisable to pay the amount you estimate will be due no later than April 15. Failure to pay also applies to outstanding back taxes from every year, so small fees can quickly turn into very large amounts.
Applying Late Penalties
If you file after the April 15 deadline and you pay your taxes late, you will be charged both filing and payment penalties for each month or fraction of a month they are late. Fortunately, if you are subject to both penalties simultaneously in any given month, the IRS grants a reduced penalty of 4.5% (5% - 0.5%) for that month only. The maximum penalty amount still stands at 25% for each of the two violations. If you delay paying the tax owed and accrue the maximum penalties for both, you can be liable for a combined 47.5% (25% + 22.5%) in late fees. Using our example above, if $50,000 in tax is due plus the maximum late penalty fees, that would amount to a total penalty of $23,750 or $73,750 in taxes owed!
There are extenuating circumstances the IRS recognizes as legitimate reasons or “reasonable cause” for not filing by the deadline. These are:
The death or serious illness of the taxpayer or a member of the taxpayer’s immediate family when that taxpayer had sole authority to file the tax return.
The destruction of the taxpayer’s business records or place of business by fire or other casualty.
The unavoidable absence of the taxpayer responsible for filing the return or inability to obtain the necessary records.
The reliance by the taxpayer on erroneous oral or written IRS advice.
The best thing to do is file your taxes and pay the amount due by the filing date. That means apart from extenuating circumstances, the tax owed is due to be paid by April 15. If it’s not possible to pay the full amount there are a few options:
Set up a payment plan
Make an offer for a settlement, or Offer in Compromise
In severe cases, file for bankruptcy
Inaction on your part to file and/or pay your taxes may also result in a tax levy where the IRS can seize your assets in lieu of payment for back taxes. The IRS can even garnish your wages in order to recover a tax debt, leaving you with only enough to support basic living necessities.
If you need assistance or have questions about filing and paying your taxes on time, please contact us today for a FREE consultation. No matter how awful it seems, there's always something which can be done about it. The longer you wait, the more you may owe!
While many taxpayers look forward to receiving a check from the IRS each year, some face the unexpected reality they actually owe money. While this may not always amount to much, occasionally things get overlooked or circumstances change mid-year which can lead to larger sums. So, what should you do if you’re unable to pay your taxes?
Don’t panic! If you can’t pay the full amount of taxes you owe, you should still file your return by the deadline and pay as much as you can to avoid the large penalties and interest for late filing. You could also contact the IRS to discuss your payment options. They may be able to provide some relief such as a short-term extension to pay, an installment agreement, an offer in compromise or temporarily delaying collection by reporting your account as “currently not collectible” until you are able to pay. In some unusual cases, the IRS may even be willing to waive penalties, although you’ll still accrue interest charges on unpaid tax bills.
Request an Installment Agreement
This is the easiest way to settle tax debts. With an installment agreement, you’ll be required to pay monthly payments towards the tax amount owed in a period of less than 6 years. With this agreement you’ll end up paying more than the original amount owed but it’s a great option if you can’t afford to pay off the debt in full but are able to pay it off over time. Installment agreements for smaller amounts, and agreements which pay off quickly, are much easier to set up than larger or longer-term deals - although almost any sort of a deal can be worked out, depending on your financial situation. If you can truly only afford to pay a little on a big debt, that's all they can force you to pay.
Offer in Compromise
This option allows you to reach a “compromise” with the IRS on the tax amount owed – often for much less than the original amount. If you’ve ever heard the saying, "Settling for Pennies on the Dollar", this is what an Offer in Compromise is. It should come as no surprise this is the most difficult way to settle with the IRS. They have strict requirements to qualify for an Offer in Compromise which includes filing all your unfiled tax returns and making all required estimated tax payments. You are also ineligible if you’re in an open bankruptcy proceeding.
The purpose of an Offer in Compromise is to agree on an amount that maximizes the collection potential of the IRS. Basically, this means the IRS will only settle if you can prove that your offer will be more advantageous for them then pursuing the many effective tools they have to collect tax debts over time. An Offer could be a good choice if your total assets are significantly less than the amount of tax debt you owe, and your income is such that it's clear you will never be able to pay off the debt.
Buy More Time
If you need to buy more time to pay the total amount due, it can easily be done by using your understanding of the IRS system to your advantage. Essentially, when taxes are unpaid it triggers the automated IRS notification system. Once this happens, the IRS will begin sending a series of letters before it begins the collection process. Typically, the IRS sends an original assessment letter stating the amount of tax owed plus any interest and penalties. Next, it will send a series of two CP Letters (computer notices noted by a CP number in upper right). Once you start receiving the CP letters you have roughly 3 months before the IRS takes collection action if nothing is done on your part.
To delay the IRS and buy yourself more time, all you have to do is contact the IRS and tell them you can't pay the amount in full at the current time and ask for a 45-day extension. Once the 45 days is up and you haven't done anything, the process will begin again right where it left off and you’ll receive another letter. You must pay off the taxes owed before the IRS takes action against you, so this option is only good for someone who may not have the money right away but knows they will have it in the very near future.
Get “Currently Not Collectible” Status
The IRS may place certain delinquent tax cases in a “currently-not-collectible” (CNC) status after its agents have determined they’re unable to collect the taxes from the delinquent taxpayer.
For example, let’s assume a taxpayer falls behind in filing their returns, paying taxes, or both. The IRS will eventually attempt to collect the taxes and/or missing tax returns through its notice process, by phone calls, or in-person visits. If these attempts fail, the IRS will begin enforced collection action which may include garnishing wages or seizing bank accounts and other assets.
If at any point during this process the taxpayer demonstrates payment of their tax bill would create an “economic hardship” on the taxpayer, the IRS may close the collection case by placing the taxpayer’s account in “CNC” status. In most cases, the IRS will not even consider this status until the taxpayer is in compliance. If the IRS does allow a case to be closed CNC, it will usually be re-opened and returned to active collection status if the taxpayer fails to file a tax return in the future, accrues a new tax liability, or the taxpayer’s financial situation changes sufficiently to allow payments to be made against the tax debt.
It’s worth pointing out that CNC status is only a temporary solution and not an option for permanent tax relief. The tax is not forgiven or compromised, and interest and penalties continue to accrue. You should also note it's incumbent on you to prove that paying the taxes will create an economic hardship, which means you’ll have to engage in extensive financial disclosure and documentation for the IRS to accept this option. They won’t just take your word for it! However, if you're truly strapped for cash this can be a much quicker, easier and cheaper option than an Offer in Compromise.
Hire a Tax Specialist
Tax specialists are by far the best way to resolve tax debt issues. The policies and procedures which the IRS uses to handle collection cases are constantly changing, as well as being subject to the local “interpretation” of whatever IRS agent you happen to be talking to that day. An experienced tax specialist knows the rules, understands tax law and has the most current information about what relief options may be available. As such, they’re able to use this information to your advantage.
William D. Truax and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping individuals and businesses address tax debt and compliancy issues for over 30 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.
If you need assistance or have questions about paying your taxes, please contact us today for a FREE consultation. The longer you wait, the more you may owe!