Tips for Taxpayers Who Can’t Pay Their Taxes on Time

Issue Number:    IRS Tax Tip 2013-53

If you find you owe tax after completing your federal tax return but can’t pay it all when you file, the IRS wants you to know your options.

Here are four tips that can help you lower the amount of interest and penalties when you don’t pay the full amount on time.

1. File on time and pay as much as you can. Filing on time ensures that you will avoid the late filing penalty. Paying as much as you can reduces the late payment penalty and interest charges. For electronic payment options, see IRS.gov. If you pay by check, make it payable to the United States Treasury and include it with your return.

2. Consider getting a loan or paying by credit card. The interest and fees charged by a bank or credit card company may be lower than IRS interest and penalties. For credit card options, see IRS.gov.

3. Request a payment agreement.  You do not need to wait for IRS to send you a bill before requesting a payment plan. You can:

    • Use the Online Payment Agreement tool at IRS.gov, or
    • Complete and submit Form 9465, Installment Agreement

Request, with your tax return. Find out about payment agreement user fees at IRS.gov or on Form 9465.

4. Don’t ignore a tax bill.  If you get a bill from the IRS, contact them right away to talk about payment options. The IRS may take collection action if you ignore the bill, which will only make things worse.

In short, it is always best to file on time, pay as much as you can by the tax deadline and pay the balance as soon as you can. For more information on the IRS collection process go to IRS.gov or see IRSVideos.gov/OweTaxes.
Additional IRS Resources:

IRS YouTube Video:

Relief Available To Many Extension Requesters Claiming Tax Benefits

IR-2013-31, March 20, 2013

WASHINGTON —The Internal Revenue Service today provided late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the forms that couldn’t be filed until after January.

The relief applies to the late-payment penalty, normally 0.5 percent per month, charged on tax payments made after the regular filing deadline. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act.

Taxpayers using forms claiming such tax benefits as depreciation deductions and a variety of business credits qualify for this relief. A complete list of eligible forms can be found in Notice 2013-24, posted today on IRS.gov.

Individuals and businesses qualify for this relief if they properly request an extension to file their 2012 returns. Eligible taxpayers need not make any special notation on their extension request, but as usual, they must properly estimate their expected tax liability and pay the estimated amount by the original due date of the return.

The return must be filed and payment for any additional amount due must be made by the extended due date. Interest still applies to any tax payment made after the original deadline.

Further details on this relief, including instructions for responding to penalty notices, is available in Notice 2013-24.

Tax Statements You Need to File

By Kay Bell | Bankrate.com – Fri, Jan 18, 2013 12:17 PM EST

Statements are on the way from employers, banks, stockbrokers and other institutions and agencies that were involved in taxpayers’ financial lives last year. Each of these groups has, by law, until Jan. 31 (or the next business day when that date falls on a holiday or a weekend) to get their annual tax statements in the mail to you.

Many taxpayers now receive these documents electronically. So be sure to double-check your email, not just the curbside mailbox, for these statements.

Common income, deduction statements

Most taxpayers depend on the same basic data to file returns. If you work for someone else, the Internal Revenue Service expects you, and the agency, to get a statement detailing that income. The data are slightly different, depending on whether you get paid a salary or do contract work, but there’s a form for either case.

W-2 — This is the key form, and you need one from each employer you worked for during the past year. Your W-2 shows how much money you made, how much income tax was withheld, Social Security and Medicare taxes paid, and any benefit contributions — retirement plans, medical accounts and child care reimbursement plans.

1098 — For most homeowners, mortgage interest is tax-deductible, and this document will tell you how much you paid last year. Your lender is required to send you one of these forms if you paid at least $600 interest. Actually, your mortgage company probably won’t send you an official IRS form, but a document of its own design that contains the same data. In addition to the mortgage interest, other information often found on this statement includes amounts paid toward points to get the loan and escrow disbursements for real estate taxes (also deductible) and property insurance (not deductible).

1098-E — Are you paying back a student loan? The interest on your educational debt is reported on this form; your lender must send you one if the interest tally is at least $600. You may be able to deduct your student loan interest and possibly other loan-related amounts, such as origination fees and capitalized interest. To figure the deductible portion of the interest amount found here, use the work sheet in your Form 1040 or Form 1040A instructions.

1099-INT — If you earned more than $10 in interest on a bank account or a certificate of deposit, you’ll get one of these forms for each account. Don’t dismiss this statement if you reinvested the interest. Tax law says you received the income even if you didn’t actually have it in your hand, and reinvested earnings are still taxable income. 1099-INT statements also are issued to people who cashed in savings bonds.

1099-DIV — Earnings from individual stocks and mutual funds are reported on Form 1099-DIV. This will show dividends and capital gains distributed over $10. As with reinvested interest, if you used the dividends or distributions to buy additional shares of the stock or mutual fund, you still have to pay taxes. However, the distributions and certain, qualified dividends are taxed at the lower capital gains rates.

1099-B — If you sold stocks, bonds or mutual funds, you will receive a 1099-B from your broker or mutual fund company. This will tell you the number of shares sold, when they sold and the amount you got for the sale. You’ll need this information, along with the date you bought the shares and the amount you paid for them, to figure your taxes. Beginning with 2011 statements, brokers will begin providing information on the basis (the cost of an asset plus some adjustments) of sold stock.

1099-G — Taxpayers who got a refund of state or local taxes last year will get this form. If you used those taxes as a deduction on your previous year’s federal income tax return, you’ll need to report the 1099-G amount on this year’s return. You don’t have to worry about reporting this refund as income, however, if you took the standard federal deduction instead of itemizing.

1099-K – If you received payments via credit or debit cards or from third-party payment processors, such as PayPal, Amazon and eBay, you might receive a 1099-K reporting those amounts. There are triggers for amounts ($20,000) and transactions ($200), so not every person who receives such payments will get a 1099-K. This income, however, is taxable and should be reported even without issuance of a 1099-K. The new statement is an attempt to get more information on such payments to the Internal Revenue Service.

1099-R — If you received a pension or a distribution from an individual retirement account or retirement plan, the 1099-R provides the details of these transactions. The form is issued by your broker, pension plan manager or mutual fund company. You’ll also get a 1099-R if you rolled over money in a retirement plan, usually a 401(k) to an IRA, or if you converted a traditional IRA to a Roth IRA. A rollover usually is not a taxable event, but a pension payout may be.

1099-MISC — Self-employed individuals who earned $600 or more should get a 1099-MISC from the employer. You should get a separate 1099-MISC for each independent job you had during the previous tax year.

Late-arriving forms

There are a couple of statements you might need for your tax records, but because of the intricacies of the financial arrangements they cover, the documents do not always arrive before the April filing deadline. But if you get an extension to file, you shouldn’t have any issues.

Form 5498 — Any contributions made during the calendar year to any individual retirement accounts are reported on this form. The 5498 shows traditional IRA contributions that might be deductible on your tax return, as well as any rollovers, including a direct rollover to a traditional IRA, made during the last tax year. It also reports amounts recharacterized from one type of IRA to another. It notes any amounts converted from a traditional IRA, simplified employee pension or savings incentive match plan for employees to a Roth IRA.

Form 5498-ESA — Contributions to Coverdell education savings accounts, formerly known as Education IRAs, previously were reported on Form 5498, but these plans now are tracked on this statement. The youngster named as account beneficiary should get a copy of this document by April 30.

Schedule K-1 — Finally, if you received money from an estate, trust, partnership or S corporation last year, you should get a Schedule K-1. However, because of the complexity of many of these arrangements, account managers tend to send out K-1s later in the tax season — sometimes not until after the April filing deadline.

Because you do need to know this amount of K-1 income to file your return, taxpayers who get K-1s tend to file Form 4868, Application for Automatic Extension of Time to File, to get six more months to get all their tax statements in hand.

Can’t make today’s deadline? File an extension.

Are you unable to complete and file your federal individual tax return by the April 17th deadline? If so, you can request an extension of time to file, which will automatically give you until Oct. 15, 2012, to submit your tax return to the Internal Revenue Service.

An extension gives you an additional six months to file your tax return. But keep in mind that an extension of time to file is not an extension of time to pay. All outstanding balances are due on April 17, 2012.

Numerous Ways to Get an Extension

In order to get an extension, you need to file Form 4868 with the IRS.

Taxpayers can electronically file Form 4868 through IRS Free File or Free File Fillable Forms. Using Free File to prepare and electronically submit Form 4868 is free to everyone, regardless of income.

Paid preparers can also electronically file Form 4868 as can tax software that you run on your computer.

Finally, a paper version of Form 4868 is available for download from IRS.gov. However, the IRS will only provide an acknowledgement of your extension request if you e-file or Free File the request.

When you request an extension, you need to estimate your tax liability and pay any balance due bu the April 17th deadline. If you are unable to pay the total balance due, you should pay as much as possible and apply for an installment agreement.

What if you can’t pay your taxes?

 By Amy Feldman | Reuters – 16 hours ago
 

NEW YORK (Reuters) – It’s one of the worst tax time scenarios: You discover while doing your taxes — or you just know without even doing them —that you owe taxes, and you don’t have the cash. What should you do?

You may be tempted to ignore the problem. Don’t do it. The worst thing you can do is put off filing your return because you’re afraid of the bill. The Internal Revenue Service (IRS) penalties for not filing are more punitive than the ones for not paying.

The failure-to-file penalty runs to 5.0 percent a month that your return is late, up to 25 percent, with a minimum penalty of $135. The failure-to-pay penalty is just a fraction of that, at 0.5 percent a month of the unpaid tax at April 17, and even that is cut in half for taxpayers who set up a formal installment plan with the IRS. Either way, you’ll also owe interest, currently at a modest 3.0 percent a year.

Consider the case of a taxpayer who owes $2,000 and won’t have the money until the end of June. If she files a return or an extension by April 17, the total penalties and interest due would be just $43, according to an analysis run by The Tax Institute at H&R Block for Thomson Reuters.

But if she puts off filing until June 30, and pays then, those penalties and interest would multiply to $314, said H&R Block. The longer this taxpayer waits to file, the more those fees would balloon.

“That’s a lot of money for late filing,” says Allison Shipley, a partner at PricewaterhouseCoopers in Miami. “And, in my experience with clients who have had a difference with the IRS, they tend to be more lenient if you’ve always filed your returns on time.”

So the first step to consider if you’re not ready to file is the simplest: File for a six-month extension, using Form 4868. As long as you’ve paid 90 percent of the taxes you owe by April 17, you will not owe the late-filing penalty. You will, however, still owe interest on any unpaid taxes.

If you have the cash, but have run out of time to deal with the paperwork, you can send in an estimated amount to avoid some or all of that interest. Similarly, if you owe taxes, but can’t pay all that you owe, you could send in a partial payment to cut the interest and penalties due.

HARDSHIP BREAKS

The IRS does offer a few hardship breaks for cash-poor filers. The big one in effect this year is called Fresh Start, and lets those who were unemployed request a six-month extension to pay this year’s tax bill without being charged any penalties.

You would qualify if you did not have a job for 30 straight days in 2011 or in 2012 until April 17, or if you were self-employed and saw your income drop by at least 25 percent in 2011 due to the economy. You would file Form 1127, and automatically get until October 15 to pay. While you would get out of the penalties for six months, you would still owe interest.

Those who have survived a natural disaster or who are on active military duty may also qualify for penalty-free extensions for varying amounts of time.

FINDING THE CASH

If you are not in one of these special categories, and you owe more than you have, you may want to weigh your various options for finding the money you need. You could: (1) put your tax bill on your credit card; (2)Use a home-equity line of credit; (3)just pay late and swallow the penalties and interest; or (4)ask the IRS to accept a formal installment agreement.

While the standard advice is to pay the IRS first, that may not make sense this year. IRS rates are so low, compared to credit card rates, that it may make more sense to deal with the tax agency directly. A tax installment payment plan, even with penalties, costs around 6.0 percent a year.

“This is an interesting time for strategy because of those low rates,” says Larry McKoy, a certified public accountant at Dickson Hughes Goodman in Glen Allen, Virginia.

Not only is the average rate on credit cards currently 15 percent, according to CreditCard.com, but when you pay taxes on a credit card you also have to pay an added “convenience fee” that could add as much as 2.0 percent to your transaction. That’s because the IRS is prohibited from paying the interchange fees most retailers pay on card transactions.

If you have access to a home equity line of credit, it may be worth tapping that because the rate is likely lower and you do not have to worry about those taxes hanging over your head, says Gregg Wind, a certified public account with Wind & Stern in Los Angeles.

INSTALLMENT PLAN COMPLEXITITES

There’s no hard-and-fast rule for when to do an installment plan, but the higher the amount you owe and the longer it will take you to pay it, the better off you are to request one rather than simply paying late. An installment plan will put your payments on a monthly schedule and cut your penalty on unpaid taxes in half, to 0.25 percent.

To set one up, you will file Form 9465 and pay an application fee of between $43 and $105, depending on your income level and whether you are willing to pay through automatic deductions from your checking account or paycheck.(The instructions to Form 9465 are available at the IRS website (http://www.irs.gov/pub/irs-pdf/i9465.pdf)

The IRS can reject an installment agreement, but usually does not, unless filers owe an astronomical sum or request a overly lengthy payment period. In fact, acceptance is guaranteed if you owe less than $10,000, request a payment period of three years or less, you have paid all your taxes for the last five years and the “the IRS determines that you cannot pay the tax owed in full when it is due,” according to the IRS’s rules on installment agreements.

For larger tax liabilities, the process gets more complex, though there is a streamlined application process for those who owe no more than $50,000. Taxpayers who owe larger amounts must file Form 9465-FS.

“If it’s under $50,000 you are not going to be asked to file a lot of financial information,” says Wind. “A lot of people are overwhelmed by the thought of compiling a lot of financial information, but they don’t need to be.”

Better to fill out a few extra forms than get stuck paying 5 percent a month, every month, for not filing them.

(The author is a Reuters contributor. The opinions expressed are his/her own.)

(Amy Feldman; Editing by Linda Stern)

Tax Day is April 17 this year

CNNMoney.comBy Blake Ellis | CNNMoney.com – 4 hours ago

Tax Day is drawing near, but you still have a little time left to get your return filed to Uncle Sam.

While the tax filing deadline typically falls on April 15, this year taxes are due Tuesday, April 17.

The extra break was granted because April 15 is a Sunday this year, and Monday is Emancipation Day, a holiday in Washington D.C. that celebrates the freeing of slaves in the district. Under the tax code, filing deadlines can’t fall on Saturdays, Sundays or holidays.

Last year, Tax Day was extended until April 18, also thanks to Emancipation Day.

The IRS said earlier this year that it expects to receive more than 144 million individual tax returns this season, with the majority projected to be submitted by the new April 17 deadline. As of the end of March, the IRS had already received 91 million returns and had doled out refunds to 75 million taxpayers — with refunds averaging $2,286.

If you still can’t get your taxes completed on time, you can always file for a six-month extension by submitting Form 4868. Or you can even do it on your smartphone by using Taxsoftware.com’s Form 4868 Extension app.

If you don’t owe any taxes, then you won’t be hit with late penalties for failing to file on time. Just be absolutely certain that you don’t owe the IRS money — if your calculations are wrong, the IRS will come after you. If you do end up owing taxes, the penalty for filing late is 5% of the amount owed for each month that you fail to file, up to a maximum of 25% (which would be reached after five months).

Also, when rushing to meet the tax deadline be careful about how fast you drive to the post office — or to the nearest tax preparer. Your odds of getting into a fatal car crash jump by 6% on tax filing day, according to a study published in the Journal of the American Medical Association.

Ten Common Tax Misconceptions

By Laura Saunders | The Wall Street Journal – Sun, Mar 11, 2012 11:27 PM EDT
 

The tax code has gotten so complicated that even smart people make big mistakes about filing taxes, according to the National Association of Enrolled Agents. Here’s a list of taxpayers’ common misconceptions gathered by enrolled agents across the country. (Enrolled agents, by the way, are allowed to represent taxpayers before the Internal Revenue Service, after passing a stiff competency exam and a background check; they also prepare tax returns.)

1. “I’m filing an extension this year, so I don’t need to pay anything yet.”

When an extension is filed, it is just an extension on the time to file; it is not an extension on the time to pay! If a taxpayer owes $1,000 on a personal return and files an extension, he or she has until Oct. 15 to file the return. But if the $1,000 is still owed by April 18 (taxes are due on April 17 this year), interest and penalties start to accrue. To avoid paying a penalty, you must pay at least 90% of what you estimate you owe or 100% of your 2011 tax liability prior to April 18.

If you don’t pay in full, you’ll wind up owing interest and possibly penalties on the liability not covered. The IRS did recently announce that it would allow some struggling taxpayers a six-month grace period. For details, click here.

2. “I had a big loss in the stock market this year, so I won’t owe any income taxes.”

The deduction of capital losses against ordinary income is limited to $3,000.

3. “I traded some stocks and have a loss/didn’t make any money, so there’s no need to report those sales.”

The sales must be reported on the taxpayer’s return. If the stocks were bought in 2011 or after, both the broker and taxpayer must provide the “cost basis” (often the purchase price) to the IRS as well. Brokers provide this information to taxpayers, but they should check carefully to make sure it is correct. This is the first year brokers have had to report cost basis, and there have been reports of mistakes. 

4. “I reinvested my dividends and didn’t receive them, so I don’t have to pay tax on them.”

Wrong. Whether you receive them or reinvest them, they are income.

5. “They paid me in cash and I don’t have to report it.”

If it’s income, you must report it.

6. “I’m too young/too old to have to pay taxes.”

Even a dependent high school student has to file a return after earning income over $5,700. And Uncle Sam may still be interested in your return after you’re dead. A personal representative of the decedent is required to file a final personal tax return, and possibly an estate-tax return, and pay the taxes due.

7. “If I didn’t receive a document about it, it’s not taxable.”

A good tax preparer will provide a checklist for missing documents, but too often taxpayers who prepare their own returns will fail to include important information simply because they missed something in the mail, or the document was never mailed.

8. “Income earned in a foreign country is not taxable.”

Taxpayers are required to report all earned income to the IRS, no matter where it was earned. Taxpayers can face huge penalties for not reporting foreign financial accounts or income earned abroad.

9. “Income from my hobby can’t be taxable.”

The operative word here is “income.” It’s taxable.

10. “The IRS doesn’t care about my state tax refund.”

Taxpayers who itemize their deductions are allowed to deduct all state taxes paid or withheld on their federal return, so in reality, paying taxes on last year’s refund is correcting an over-deduction from the previous year.