[Updated] As the tax deadline rapidly approaches, many Americans are yet to file their returns. This could be because they have a tax liability and due to a drastic change in their financial or personal circumstances over the year, they cannot afford to file their taxes. You can get a good idea of your tax liability (for free) by using Turbo Tax or other online software, since you only pay when you file. So if you are not filing for fear of a tax bill – make sure you get the facts first. With the amount of government subsidies and stimulus payments you may actually qualify for a refund or a much lower tax bill than you think.
If you think your taxes are going to be manageable and you just want more time, then file an extension. The IRS offers the option of filing an extension (using form 4868), which extends your filing date by 6 months to October 15th. While filing an extension is easy, it is not free and has consequences. Here’s a few things you need to know.
- If you think you’re going to owe taxes, you still need to pay by April 15th in order to avoid any late penalties. This means you need to send Form 4868 and a check of what you think you owe to the IRS by April 15th. Filling an extension with the IRS only allows you to postpone when you actually file your return, it doesn’t mean you can pay later as well. This is important, because the penalty could be up to 25% of your outsanding tax bill. The actual late payment penalty is up to 1% of any tax due and will be charged each month the tax remains unpaid, up to a maximum of 25%.
- You do not have to explain why you are asking for the extension. The IRS will contact you only if your request is denied.
- As mentioned above, use an online tool (like TurboTax) or go the IRS website to figure out your liability and e-file for your extension. I do know people who have underpaid, thinking that they will pay the rest at the end of extension period, but soon realize that late payment penalties can be a big hit to already stretched finances. So even if you cannot afford to pay all your taxes you think are due, try and at least make a partial payment when filing the extensions.
- A federal tax extension filing does not automatically extend the deadline for your state income tax return.
If filing a tax extension does not help, you are most likely at the point where you realize you are not in a position to pay your taxes on April 15th. The key thing is to deal with this problem (not hide from it) in a proactive manner and not to panic. Surprisingly, the best way to deal with the tax problem is to call the IRS. Yes, your most feared creditor can also be your salvation, especially under current economic conditions where so many families are struggling. Review the IRS website (irs.gov) and call them at 1-800-829-1040 to discuss payment options.
Based on your situation, the agency could give you a short-term extension of time to pay or set up a payment installment agreement.With a short-term extension, you are given up to 120 days to pay and there is no fee. With an installment plan, you must owe less than $25,000 and agree to make regular monthly payments to pay off what you owe. The IRS charges a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account. You don’t have to call to create a payment plan. You can set one up online. If the IRS grants online approval of your request for monthly installments, you will receive written confirmation within 10 days.
For more on this and other options on help dealng with late taxes, see the IRS’ web page called The “What Ifs” of an Economic Downturn. Aware that the economic downturn has affected many people, the agency urged taxpayers in difficult financial situations to file a tax return, pay what they can and work with the IRS to establish a payment plan that will keep them compliant. It also explains how, if your income decreases, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit.
Finally, many of our brave members in the armed forces and some others serving in combat zones, or in support, can wait until after April 15 to file and pay their taxes. As a general rule, those eligible get the extra time penalty-free and interest-free without having to ask for it. Normally, the filing and payment deadline is postponed until 180 days after the service member leaves the combat zone.