In fact, for people who owe taxes, not filing a tax return or extension to file by the deadline can increase what they owe the IRS by up to 25 percent in penalties and interest.
So how does that happen? Well, the penalty for not paying in full is 0.5 percent of the unpaid balance per month, whereas the monthly penalty for not filing a tax return is 10 times that amount (5 percent). And, interest also accrues on the unpaid tax and the penalties assessed.
What if you can’t pay the IRS by April 17?
The following scenarios created by The Tax Institute at H&R Block show the financial impact of three tax payment options. These scenarios assume an original balance due of $2,000 and the taxpayer paying the balance in full by Oct. 15, which is the deadline to file a return for those who got an extension to file.
Unemployed and can’t pay?
The unemployment rate is going down, but the millions who were unemployed at any time last year or this year could find it difficult to pay their taxes in full by the April 17 tax filing deadline. The IRS’s new Fresh Start Penalty Relief Initiative can help some of these taxpayers.
The Fresh Start initiative includes provisions giving certain unemployed taxpayers until Oct. 15 to pay their taxes with no failure-to-pay penalty assessed. To participate in the Fresh Start initiative, taxpayers must meet all of the following eligibility requirements:
The taxpayer must complete new Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, which must be postmarked no later than April 17, 2012.
IRS payment options for other taxpayers
Other Fresh Start options are available for all taxpayers who meet the qualifications, including revamped installment agreements and offers in compromise.
An installment agreement will reduce penalties, but interest will continue to accrue on the outstanding balance. The threshold for using an installment agreement without having to supply the IRS with a financial statement has doubled from $25,000 to $50,000. The maximum term for installment agreements is now 72 months instead of 60 months.
Recent changes to the offer in compromise program make this option available to more taxpayers. An offer in compromise is an agreement that lets a taxpayer settle the tax debt for less than what is owed. However, if the IRS believes the full amount can be paid in full as a lump sum or through a payment agreement, it is unlikely the request will be accepted. In making this determination, the IRS reviews the taxpayer’s income and assets.
Even if a taxpayer isn’t able to pay the taxes due and is not eligible for an IRS relief option, filing a tax return or an extension to file can help limit how much ultimately must be paid in penalties and interest. Talking to a tax professional can help taxpayers save time and money when they are short on both. Participating H&R Block offices are offering taxpayers free extension filing through April 17.
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