It was an eventful 2009 with the IRS taking on major companies and even countries to recover taxes and penalties owed by businesses and individuals. With the economy in a slump, and tax revenues falling, the IRS and many State governments are trying to close the tax gap (the difference between taxes owed and taxes paid) with increased tax collection efforts.
Here are a few guidelines with situations for avoiding and reducing IRS interest, filing penalties, and underpayment penalties this tax season:
If You Cannot Pay All Taxes Assessed or Owed By April 15th In Full
File Your Tax Return (unless you made less than minimum IRS requirement) - If you cannot pay all or part of your taxes then send what you can but always file your tax return otherwise a failure to file penalty of 5% per month will take effect on any taxes owed. If you fail to file for 5 months, this interest rate can be as high as 25%.
Pay What You Can Without Compromising Basic Necessities To Lower the 4% (subject to change per qtr) Underpayment Penalty – This is calculated by taking the federal short term interest rate of 1% and adding it to the general underpayment penalty for individuals of 3%. This gives you a combined penalty of 4%. The more taxes you pay, the less interest accrued.
Reduce the Failure to Pay Penalty from .5% on taxes owed to .25% monthly with an IRS Installment Agreement or IRS Payment Plan. This essentially saves you 50% percent in terms of the normal failure to pay penalty per month. Even though it is compounded monthly, this brings the annual nominal yearly interest rate down from 6% to 3%. Fill out IRS form 9465 or use the Online Payment Agreement Application if you owe less than $25,000. If you will have $25,000 in tax debt you will need to include Form 433-A (Collection Information Statement or CIS) with Form 9465. It is recommended if you owe over $25,000 to work with a tax professional here as the CIS can be challenging.
Bottom-Line: You save up to 3% (nominal) annually with an Installment Agreement (paid monthly), avoid the 5% per month failure to file penalty by filing, and reduce your underpayment interest amount by paying what you can afford if you are unable to pay all or some of the taxes owed.
This is a guest post from Matt Robinson at TaxDebtHelp.com. Matt has been helping Federal and state taxpayers find IRS tax debt relief for over 10 years now. His firm focuses on on tax debt solutions and has constructed a new self-help site for taxpayers to resolve minor tax problems.
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