Tax time – A reminder of the basics

wealthy@tri-statedefender.com | 4/2/2013, 8:22 a.m.

Importance of filing on time

When you owe taxes to the Internal Revenue Service (IRS), it is imperative that you file and pay on time or you may be subject to penalties and interest on the amount due. However, if you have a refund coming, there is no penalty for filing late.

Types of penalties

Failure to file Penalty: This penalty is calculated based on the time from deadline of the tax return due, which may include extensions to the date the return is actually filed. The penalty is 5 percent for each month the tax return is late, up to a total maximum penalty of 25 percent of the tax due as shown on the tax return filed.

Failure to pay penalty: This penalty is calculated based on the amount of tax you owe as shown on the tax return filed. The penalty is 0.5 percent for each month the tax is not paid in full. Unfortunately, there is no cap or maximum limit to this failure to pay penalty, which is calculated from the original filing deadline of April 15 until the full balance due is paid.

Interest

Interest is calculated based on the taxes that are due. Interest rates change every three months. Currently, the IRS interest rate for underpayment of tax is now about 4 percent per year.

Filing late

With all of the penalties at the disposal of the IRS, it is better to file on time. However, if the lateness simply cannot be avoided, at least file an extension to potentially avoid or reduce the failure to file penalty. You still may be subject to failure to pay penalty and interest, but it will still be worth it to avoid the potential of up to a 25 percent penalty.

Payment options

To avoid all interest and penalties, it may be more economical to borrow the money to pay from family and friends, draw on a home equity loan or even look to a credit card as an option. While a few of these options may have interest, they are probably far less than 25 percent.

Installment plan

If all else fails and you just cannot come up with the necessary funds to pay the IRS the taxes due, an installment payment plan may be able to be negotiated. First, you must complete Form 9465, which is the Installment Agreement Request. Attach it to the income tax return. You should include the amount you propose to pay each month and the dates of the month the payments will be made.

The IRS will notify you if this Installment Agreement Request has been approved. There is a fee of about $45 for establishing an agreement. Remember, interest may continue to accrue until the balance is paid in full.

No money compromise

If the amount you owe the IRS is so great that you may never be able to pay it, the IRS may accept less than what is owed through the Offer In Compromise Program. You must complete Form 656 – Offer In Compromise and Form 433A – Collection Information Statement. Submit both of these forms to the IRS, along with the $150 application fee. Additionally you must provide a personal financial statement, which includes all of your assets, debts, income and the amount you can pay immediately in an effort to settle this debt.