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Riverwoods, IL (Profitable.com) With the April 15 filing date looming, taxpayers who haven’t started working on their taxes could be in a race against the clock and may be interested in filing for an extension. An automatic six-month extension for federal taxes is available, if you follow the right steps. What’s very important to know, however, is that an extension of time to file is not an extension of time to pay taxes that are due. CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), takes a look at what taxpayers need to know when filing for a deadline extension.
“Taxpayers need to know that filing an extension does not give you more time to pay the IRS what you may owe,” said CCH Principal Federal Tax Analyst, Mark Luscombe , JD, LLM, CPA. “If you need an extension to complete your taxes, you should have a good idea of any taxes you may owe and be ready to pay that amount by April 15. But if you can’t, then you can work out an agreement with the IRS to pay the balance.”
Any tax payments not made on time can be subject to interest and penalties on the balance.
Why File for an Extension?
Most taxpayers file for an extension because they simply need more time to get their paperwork in order to provide to the IRS. For those who may be dealing with personal issues, having trouble obtaining receipts for deductions or just need more time just to get every part of their return completed, a six-month filing extension is available by submitting Form 4868, “Application for Automatic Extension of Time to File U.S. Income Tax Return.” The form provides a six-month filing extension to October 15, but it must be filed by April 15 to avoid late filing fees and possible penalties.
Taxpayers do not need to explain why they need an extension when filing Form 4868, the extension is automatic. The form, which can be downloaded for free from the IRS by clicking here, provides additional instructions on getting a filing extension, completing each part and details on where and when to file.
What If You Need More Time to Pay?
If the issue isn’t about the documentation, but has to do with the inability to pay, then filing for an extension is not the best alternative. Instead, the IRS recommends filing your tax return on time and making a payment for as much as you can by check, credit/debit card or through an electronic funds transfer (EFT) from a bank account.
The IRS will acknowledge the payment and will send a bill for the balance due. Options such as an Online Payment Agreement (OPA) and other payment plans are available for taxpayers who qualify by visiting irs.gov and clicking on the “Payments” tab at the top left of the home page.
Other alternatives include…
1. Borrow, liquidate assets or charge it.
Taxpayers who owe and can’t pay their entire tax bill when it’s due, but can pay the full amount within 120 days, can ask the IRS for a short-term administrative extension. Another option besides using a credit card is to secure a bank loan, such as a home equity loan, or cash out a retirement account.
While going into debt to pay off a debt may not seem the best option, the interest rate and fees assessed by a bank or credit card issuer may be lower than the interest and penalties assessed by the IRS. Credit card payments must be made electronically, through personal tax software, a paid tax preparer or through credit card service payment providers.
2. Enter into an installment agreement with the IRS.
The IRS is required to accept installment payments if a taxpayer has a good filing and payment record over the past five years, the amount owed is not more than $10,000 and it can be paid off in full within three years.
Small businesses may enter into “streamlined” installment agreements if their debt is below $25,000 and they agree to pay it off in 24 months. This option is available to small businesses that file as an individual or as a business.
3. Reach an offer in compromise with the IRS.
In some instances, the IRS may accept less than the full amount due. This typically occurs if the taxpayer can show that the full tax debt could never be collected or they have a dispute with the IRS as to how much is owed, but neither party wants to enter into a legal battle to resolve the issue.
Under the new rules issued in 2012, the IRS made the rules for approving offers in compromise more flexible. Taxpayers with incomes of up to $100,000 (up from $50,000) and who have a tax debt below $50,000 (up from $25,000) are eligible for a streamlined offer in compromise process from the IRS.
Penalties for Ignoring Tax Deadlines
The worst thing you can do is ignore your tax liability. Some of the penalties taxpayers may face and actions the IRS may take if returns and payments are not filed on time include:
- Failure-to-file penalty– The taxpayer faces a penalty of 5 percent of the tax due for every month or any fraction of a month that the return is overdue, capped at 25 percent;
- Substitute tax return – The IRS can file a substitute tax return for the taxpayer based on information it has from other sources; and
- Levies and liens – The IRS may start a collection process that can include a tax levy or tax lien against the taxpayer’s property, bank account or wages. Tax liens can impact credit ratings and make it difficult to buy and sell property and even get a job.
View a short video with CCH tax expert Mark Luscombe explaining options available to those who need help paying their taxes, including working with the IRS on a compromise: Options When You Can’t Pay Your Taxes.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CorpSystem®, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.