Tuesday, April 8, 2008

For Those Who Can’t Pay the Tax Due in Full

IRS will charge you interest and penalties if you don’t file your tax return and pay the taxes on time. But taxpayers can limit these charges by filing on time and paying sooner.

The current interest rate charged by IRS is 6 percent per year and late payment penalties, normally 0.5 percent (1/2 of 1 percent) per month, apply to any tax paid after the April 15 deadline, taxpayers can limit these charges by paying sooner. For example, a taxpayer who files on May 1, owing $1,000 in tax, would be charged interest plus a $50 penalty.

If you can not pay the tax due in full on or before the filing date of April 15, 2008, here is what you should do:
1. Make Partial Payment by April 15, 2008
Make sure to pay what ever maximum you can pay before April 15, 2008. If you are also filing your tax return, make sure to include the payment with your tax return. You will also attach Form 1040-V. If you are applying for extension to file, then send the payment with Form 4868.

Various e-pay options offer taxpayers the easiest and fastest way to make a full or partial payment with their return. These options enable taxpayers to make payments either online or by phone using electronic funds withdrawal or a credit card. Alternatively, taxpayers can send the IRS a check made out to “United States Treasury.”

If you are not paying the full amount of tax due, make sure to make a short-time payment agreement with IRS or apply for Installment Agreement.

2. Apply for 6-month’s Automatic Extension to File Your Tax Return (Form 4868)
If your tax return is not complete, make sure to file Form 4868 for 6-months extension to file your tax return. Make sure to pay all your tax due or the amount you are in a position to pay with Form 4868. If you apply for extension, then you can file your tax return up to October 15, 2008. You will not pay penalty for not filing your tax return. However, you will still pay interest on the tax due amount.

3. Make a Short-time Payment Arrangement with IRS
Taxpayers who need more time to pay can find out in just a few minutes whether they qualify for a payment agreement with the IRS. Just click on the Online Payment Agreement link and follow the prompts. By entering some basic information about their tax situation, eligible taxpayers can set up in a matter of minutes either a short-term payment extension or a monthly payment plan.

A short-term extension gives a taxpayer up to 120 days to pay. No fee is charged, but the late-payment penalty plus interest will apply.

4. Apply for Installment Agreement
A monthly payment plan or installment agreement gives a taxpayer more time to pay. Though interest still applies, the late-payment penalty is cut in half for any month an installment agreement is in effect. This reduced rate of 0.25 percent (1/4 of 1 percent) per month is only available if the tax return was filed on time.

A user fee will also be charged if the installment agreement is approved. The fee, normally $105, is reduced to $52, if taxpayers agree to make their monthly payments electronically through electronic funds withdrawal. The fee is $43 for eligible low-and-moderate-income taxpayers.

Alternatively, taxpayers can apply for a payment agreement by filling out Form 9465, Installment Agreement Request. This form can be filed along with either an electronically filed return or a paper return. If filing on paper, be sure to attach it to the front of the return.

Special Treatment for Eligible Taxpayers
Some taxpayers can wait until after April 15 to file and pay. As a general rule, those eligible get the extra time penalty-free and interest-free without having to ask for it. Eligible taxpayers include:

(a) Members of the military serving in Iraq, Afghanistan or other combat-zone localities. Normally, the filing and payment deadline is postponed until 180 days after the service member leaves the combat zone.
(b) Disaster-area taxpayers in four states affected by recent floods, storms and tornadoes. The filing and payment deadline is postponed until May 6 in parts of Illinois, May 19 in parts of Georgia and Missouri and May 27 in parts of Arkansas.

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