For those of you who have already filed your taxes, looking at today’s date is no big deal.
But for those who haven’t, noticing the dwindling number of days between now and April 15 may fill you with dread.
Is that you? Are you running out of time — or money — for tax day?
Then here’s your cheat sheet for preparing your taxes when you’re unprepared.
I’m not ready; what can I do?
For taxpayers who aren’t quite ready to file yet, whether because they have not received all of their documents, or haven’t been able to get their business records in order for example, the taxing authorities offer an automatic six-month extension to file. To get an extension, you will need to notify them by filing extension paperwork on or before April 15. For your federal extension, you need to file Form 4868; for Pennsylvania form REV-276; and New York form IT-370. All of these forms are available on their websites. For an extension of the local tax (also known as “the Berkheimer”), send a copy of your federal or state extension form.
Great, I don’t have the money to pay right now anyway
Sorry to break it to you, but an extension to file is not an extension to pay, so each taxing authority will expect a payment along with the extension if you will owe tax when you file. Essentially you’ll need to do a rough cut of your tax return, estimate how much you will owe if anything, and send that along with the extension form. Estimate high, and if you overshoot, you’ll get a refund when you do file.
What if I can’t pay the IRS?
Then you have a few options. In most cases the IRS will work with you on a payment plan or installment agreement. Penalties and interest continue to accrue while your balance is unpaid, though, 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.
There you will be asked how much you can afford to pay each month, and for 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 payment plan: $52 for direct debit; $105 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. A payment 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. Note that future refunds will be applied to your tax debt until it is paid off.
But I only need a few weeks.
Some good news — if you will pay taxes within 60 days you won’t be charged the set-up fee. Penalties and interest still apply however.
How much are the penalties and interest?
The failure to file penalty is steep, 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 be sure to file your extension. 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.
Other ways to reduce your penalties: If you file an extension and pay at least 90 percent of your taxes by April 15 and pay the remainder by Oct. 15, penalties won’t be charged. 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 2013 that is .22 percent) plus 3 percent, compounded daily.
What if I owe the state?
Pennsylvania does not have a form or online application for a payment plan; instead 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, currently at 3 percent. You can estimate what your penalties and interest might be on the website.
If you owe New York, you can request a payment agreement online. New York’s penalties mirror the IRS, and you can estimate them here.
Can I pay by credit card?
While the IRS does accept payments by credit card, it’s not free, so if you want to pay by credit card to get the points, you may find the fee wipes out any benefit. Debit card payments come with a flat fee ranging from $2.99 to $3.99; credit cards will cost you between 1.89 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 the fees the IRS charges.
You can see the options here.
My tax debt is more than I can handle, even with a payment plan.
For situations where paying the debt would cause financial hardship or when you can’t pay, you may be eligible for an Offer in Compromise. This isn’t something that’s guaranteed by any means, nor is it something you should attempt without professional help. Find a tax professional with experience in this area to help you if you think you may be eligible. You can check the prequalifier on the IRS website to see.
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