Don't delay if you owe taxes
The W2s have been sent, the numbers have been crunched, the forms are filled out and now the 2010 taxes are complete. Consumers should heave a big sigh of relief.
But what happens when the numbers show a consumer owes money that he or she does not have? The worst thing to do is nothing, said Sissy Osteen, Oklahoma State University Cooperative Extension resource management specialist.
"There are penalties for filing late and paying late; however, the penalty for failure to file is much worse than it is for simply paying your taxes late," Osteen said. "Currently, the failure to file on time penalty is 5 percent of the balance due for each month or partial month the payment is overdue. The failure to pay on time is one-half of 1 percent of the balance due per month, up to a total of 25 percent of the balance due. For individuals who file on time but don't pay on time the penalty is one-fourth of one percent. It's in your best interest to file your income tax return by the due date. If you owe money you'll still incur interest, but you'll avoid the 5 percent per month penalty for failure to file on time."
Consumers must keep in mind that penalties are not the only problem. In addition to the non-payment or the late-payment penalties, tax payers also will incur interest on the balance due. The interest for 2010 is the federal short-term rate plus 3 percent, and the interest is compounded daily.
If your current shortage of cash is temporary, consider other cash flow alternatives that will allow you to pay taxes on time.
Is it possible to get a pay advance at work? Do you have family members who may be willing to give you a short-time loan? Do you own something of value that can be sold? Homeowners may want to consider a home equity line of credit.
"Another alternative is to pay your taxes with a credit card, but remember there are fees associated with this option," she said. "You'll most likely be charged a convenience fee of around 2.5 percent of the amount you're paying. For example, if your tax obligation is $2,000, the fee will be about $50. Also keep in mind that you'll pay the current interest rate of your credit card on this new amount, so it's important to pay off your balance as quickly as possible."
To pay by credit card, consumers will need to contact a service provider approved by the Internal Revenue Service. Two options are Official Payments Corporation, 800-272-9829, or Link2Gov Corporation at 888-729-1040.
Osteen said if consumers simply have no options in which to come up with the money, they may be able to negotiate an installment plan with the IRS. Simply complete Form 9465, Installment Agreement Request, and attach it to the front of your income tax return.
"Include the amount you propose to pay each month and the day of the month you'd like to make your payments," she said. "The IRS will notify you if you're approved. There is a $43 fee for setting up the installment agreement and you'll still incur interest on the balance due."
Some consumers may run into the issue where they owe so much there is no way they can pay the whole amount. In some cases, the IRS may accept less than the full amount through a program called Offer in Compromise. Complete Form 656, Offer in Compromise, and Form 433A, Collection Information Statement, and submit them to the IRS with the $150 application fee.
Consumers in this situation are required to provide a complete personal financial statement, including everything they own of value, all debts owed, total income and the amount they are prepared to pay right away in order to settle the account.
"The IRS will evaluate the situation, as well as future income potential, to determine whether or not to accept the settlement offer," Osteen said. "If the IRS believes it won't be able to collect the full amount of taxes owed, your offer may be accepted. Keep in mind that this program is for people who are in dire financial straits."
Tax payers should also keep in mind that regardless of an installment plan or Offer in Compromise agreement, the IRS will require you to pay all of your federal tax liabilities on time for the next five years or until the amount you settled on is paid in full, whichever is longer. If you default on the agreement, all of your back taxes will once again be due in full. The IRS may file a lien on your property to ensure payment. This will show up on your credit report.
"When it comes to filing and paying taxes, it's in your best financial interest to do so on time. If that isn't possible, don't add to the problem by simply not filing at all," she said. "If you delay, you could end up paying penalties totaling half the amount you owe, and that's before interest is added to the total. Remember than all tax guidelines have special requirements and exceptions. If you have questions, you should read about specific questions at the IRS website at www.irs.gov."