If you’re ready to wave the white flag, there is relief available. Each of the taxing authorities offers an automatic six month extension to file.
To get an extension, you will need to file your extension paperwork on or before April 15. For a federal extension, file Form 4868 or file online via FreeFile. Pennsylvania does not require a separate extension request if you have an extension approved by the IRS, but if you are not extending your federal, you will need to file form REV-276. Our local earned income tax collector Berkheimer also offers an extension; send a copy of your federal or state extension form to them to get it. A form IT-370 will get you an extension in New York State. All of these forms are available on the respective websites or through your tax professional.
These extensions don’t mean much if you owe taxes; an extension to file is not an extension to pay. Failure to pay penalties and interest charged are steep as we’ll see below, so it’s wise to send in at least as much as you believe you will owe, with some for good measure to make sure you’re covered. If you send in too much, you will get it back when you do file. The IRS will let you off the hook for underpayment penalties if you pay at least 90% of your balance due by April 15 and the rest by October 15. Interest on your outstanding balance will still be assessed.
For extensions filed by mail, you can send the payment along with the form. Or make your federal payment online by visiting the IRS Direct Pay system, where you can also find credit card options. Filing your extension payment online qualifies as a valid extension request.
Pennsylvania allows extension payments through the state website E-Tides or by credit card at Official Payments. New York (and the IRS) also accepts credit card payments at Official Payments, or you can pay online.
Still not feeling the urgency? This might light the fire. The federal failure to file penalty is painful, at 5 percent of your unpaid tax per month or any part of a month, to a maximum of 25 percent. For filing more than 60 days late, the penalty is the lesser of $135 or 100 percent of the outstanding tax. So don’t forget to file that extension. Of course if you don’t owe any tax, then the lesser of those is $0, or no penalty. You have three years to claim your refund.
The failure to pay penalty on the other hand is “only” one half of 1 percent of your unpaid tax per month or any part of the month, again up to a maximum of 25 percent. You won’t pay both however; the failure to pay penalty reduces the failure to file penalty. Filing on time and participating in an installment agreement reduces the failure to pay penalty to one quarter percent per month. In addition to penalties, you will be charged interest, which is figured by taking the federal short term rate (for April 2015 that is .48 percent annual) plus 3 percent, compounded daily.
That’s all well and good if you can afford the tax payment. But what if you can’t? You still have options. In most cases the IRS will work with you on an installment agreement. Penalties and interest continue to accrue while your balance is unpaid and that can add up to a significant amount, depending on how much you owe and how long it will take to pay.
To apply for a payment plan, file your return as usual and send as much of the balance due as you can. If your taxes plus penalties and interest are $50,000 or less, you can request an installment agreement for the rest by filing Form 9465 (either with your return or separately), or by applying online.
You will be asked how much you can afford to pay each month, and must provide your banking and employment information. The amount you propose to pay should be enough to pay off the debt within 72 months, including interest and penalties. If you owe less than $25,000, you can choose to send a monthly check or pay by direct debit; if you owe between $25,000 and $50,000 you must choose to debit your account.
There is a fee to set up the installment agreement: $52 for direct debit; $120 to pay by check or payroll deduction; and $43 for low income taxpayers. If you owe more than $50,000 you may still be able to get an installment agreement but you must call the IRS directly to apply. An installment agreement request for less than $10,000 will not be denied as long as you have been compliant with tax laws for the past five years and will pay it off the tax within three years. Future refunds will be applied to your tax debt until it is paid off.
If you only need a little time to pay, 60 days or less, you won’t be charged the set-up fee. Penalties and interest still apply however.
Setting up a payment plan with Pennsylvania takes a bit more work. You must call the Collection Unit at 717-783-3000 or visit a district office. The late penalty fee is 5 percent for the first six months, then an additional 5 percent per month with a maximum of 25 percent, plus interest. You can estimate what your penalties and interest might be on the Pennsylvania Department of Revenue website.
Depending on the length of time you need to pay and the terms of your credit card, you may find it more economical to pay with plastic rather than pay the governments’ underpayment penalties on top of the interest charged. Debit card payments are cheaper than credit cards if you do have the money, with a flat fee usually under $4; credit cards will cost you between 1.87 percent and 2.35 percent with a minimum convenience fee ranging from $2.99 to $3.95. Your regular credit card interest rates will still apply to the balance; these are additional fees.
For situations where your tax debt is simply overwhelming, having a tax professional experienced in negotiating with the IRS in your
corner is a wise investment. Avoiding the problem will only make it worse.