Does your heart sink when you receive a piece of mail from the IRS?
That’s reason enough to dread tax season, but growing up, my family always filed extensions on their taxes. This added to the stress of tax season. After April, 15th no one in my family would go to the mailbox.
I decided at age 18 I was fed up and wanted to start filing my own taxes. With a little help, I was able to prepare as soon as I received my tax documents. I never stressed again, because I had plenty of time to make adjustments.
In order to make sure you can properly prepare for your taxes, start by keeping your files organized throughout the year, and plan ahead for the next tax season. This is even more important if you expect to owe money to the IRS. Having your information organized will allow you to have more time to assess your tax situation.
Here are a few guidelines for avoiding and reducing IRS interest, filing penalties, and underpayment penalties if you’re asking, “what if I can’t pay my taxes” assessed or owed in full by this year’s tax deadline:
File Your Tax Return (Most Important!)
Unless you made less than minimum IRS requirement, you should file.
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 (4.5% for not filing and 0.5% for not paying) will take effect on any taxes owed. If you fail to file for 5 months, this interest rate can be as high as 25%. If you fail to pay this can add up to 47.5% of taxes owed.
You don’t want to end up in that situation. Plan ahead!
Pay What You Can Without Compromising Basic Necessities
This will lower the 4% (subject to change per quarter) 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
You can 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 $50,000.
If you will have $50,000 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 $50,000 to work with a tax professional here as the CIS can be challenging.
Another option is to file an 843 Claim for Refund and Request for Abatement form. There are no direct standards for what the IRS will accept or deny. It is worth giving a try. You never know where negotiating will take you and it may eliminate some of the financial burden.
The 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.