This guest post is brought to you by the Tax Pros at H&R Block.com.
Any taxpayer who is unable to pay his or her tax bills should still complete a return or file a tax extension by April 18, to avoid costly penalties and interest. The monthly penalty for not filing a tax return is 5%, while the penalty for not paying in full is one-tenth of that, or 0.5%. Even if taxpayers cannot pay all of their taxes, they should send what they can with their tax return or extension to file.
Tax payment solutions close to home
- Borrowing money from a 401(k) – no early distribution penalty and you the taxpayer would pocket interest paid for the borrowing rather than paying interest to a 3rd party lender.
- Accessing funds using a credit card, but you often face double-digit interest rates and must pay IRS service providers’ processing fees ranging from 1.90 to 2.35%.
- For some taxpayers, the best bet may be borrowing money from family or friends.
Working with the IRS
Taxpayers can work with the IRS to file a tax extension to pay or to arrange an IRS tax payment plan. Interest rates and fees depend on the route taxpayers choose.
- Taxpayers who can pay their debt within 120 days can file a tax extension. If a $1,000 tax debt is owed, the total amount paid over four months would be $1,033* with penalties and interest.
- Those who need more than 120 days can use an IRS tax payment plan. If a $1,000 tax debt is paid off in six months, the total amount paid would be $1,066**. Tax debt must be repaid within five years through an installment agreement.
Taxpayers who file a tax extension or opt for an IRS tax payment plan may incur debts on their credit reports, but these debts do not cause the same harm as a property lien.
A professional tax advisor can help you with any tax questions and determine what’s best for you. You can get a free 30-minute tax consultation at an H&R Block office near you.
For those with financial hardships
- An IRS offer in compromise (OIC) settles a tax debt for less than the amount owed. The IRS will negotiate with eligible taxpayers to collect what it can. However, only 24 % of OICs were accepted in FY 2008, and the application process can take up to two years.
- New this year, the IRS weighs present and future earnings when deciding OICs, instead of just prior years’ earnings.
- Taxpayers must be current on filing tax returns, not in bankruptcy, and meet one of three conditions to be eligible:
- Taxpayer’s assets and income combined equal less than tax debt owed.
- Taxpayer believes the tax debt assessed is incorrect and there is no legal decision on the matter.
- The full tax debt is owed and is collectible, but a special circumstance exists, such as serious illness or the likelihood to deplete finances.
H&R Block has a 100% accuracy guarantee and will support you in the unlikely event of an audit when they do your taxes or when you use H&R Block online tax prep software at home.