Tax Tips: Filing an Extension and What to Do if You Cannot Pay your Taxes

The folks at Turbo Tax have provided Saving to Invest some great last minute tax tips and guidance for tax payers struggling to file their taxes. Hopefully some of these will help you as tax time draws near:

I’m  not going to be able to file my taxesin time. What should I do?

If you can’t make the mid April deadline, you are in good company. The IRS says it received requests for 11 million extensions, which amounts to about 8% of all tax returns. Taxpayers who ask for an extension get an extra six months to file—your new deadline will be mid-October. You can get some extra time without any hassle. Simply e-file for a Personal Tax Extension of your federal tax return using TurboTax Easy Extension. You can also file for an extension on the IRS website.

Important things to remember when you request an extension

First, a federal extension does not automatically extend the deadline for your state income tax return. Also, an extension to file your federal taxes does not give you an extension to pay your actual tax bill. You still have to figure out your taxes and make an estimated payment. Estimating how much money you’re going to owe can take time, so please do not wait until April 18 to get started. Last year’s tax return could be a good starting point if you haven’t experienced any major life changes. If that is the case, you can probably pay the same amount in taxes you did last year.

But if you lost your job, purchased a new home with the first-time home-buyer credit, or had a baby,  you’ll need more information to determine your tax bill. Why is it so important to come up with this ballpark estimate? You will pay a penalty if you underpay your taxes by more than 10 percent. This is where using Turbotax to get an idea of your taxes is useful, because you can walk through your tax return for free (you only pay when you file) and get an idea of your taxes and perhaps even be eligible for a refund.

What do I do if I can’t afford to pay my taxes?

The No. 1 thing to do—even if you can’t pay all the taxes you owe—is to file your return. “If there is one message to get to consumers, I cannot emphasize enough how important it is to file your return,” says an IRS spokesman.

The Expert’s advice: File your return as soon as possible, preferably before midnight on April 18. Why? Failure to file your taxes is a federal offense that could have significant legal ramifications. And if that isn’t reason enough, another incentive to file your taxes on time is a financial one. That’s because the IRS can impose a penalty of 5% of the tax you owe for each month you do not file your return. The maximum penalty is 25% of your tax bill.

Try to pay as much of the bill as you can. But if you don’t have the cash, you may be able to work out a payment agreement with the IRS. In the past few years, the IRS says it set up installment agreements for 2 to 3 million returns. It should take less than 10 minutes to figure out if you are eligible for an installment agreement on the IRS website. You can also call the IRS at 1-800-829-1040 to discuss your payment options.

Filers who pay the IRS via an automatic installment plan typically owe less than $25,000. Also, if you are interested in a payment plan, you should be in good standing with the IRS, and you should expect to pay off your bill within five years. Installment agreements can be costly, so think before you leap. 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. The interest rate fluctuates, based on the amount you owe.

If you need to amend your tax return

If you sent in your tax return already and realized you forgot to claim something, you can amend your return. It is much more common than you think and the IRS actually states that those claiming the home buyer credit this year should modify their returns if they haven’t already claimed the credit and meet the guidelines. Use Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF),Form 1040EZ (PDF), Form 1040NR (PDF), or Form 1040NR-EZ (PDF). If you used TurboTax to file your return you can follow these instructions to amend your return. To avoid any penalties and interest, you need to file Form 1040X and pay the tax by April 18 of the following year. If you are filing for an additional refund, the IRS advises you to wait until you have received your original refund.

6 thoughts on “Tax Tips: Filing an Extension and What to Do if You Cannot Pay your Taxes

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