Easy and effective solution for tax payers who cannot pay their complete tax dues on time

Whenever you read an article on tax extension, one point that every author mentions is that ‘tax extension only extends the due date to file your tax return; it does NOT extend the due date to pay your tax liabilities’. Hence, the advantage that tax extension provides is that it provides you extra 6 months to file your taxes, but not to pay your taxes. However, this brings a lot of questions in the minds of taxpayers. One major one being; ‘What if I cannot afford to pay taxes by the due date?’

If you do not pay your tax liabilities by the due date despite applying for an IRS tax extension, then you will fall under the category for late payment penalty and will be charged interest.

Late payment penalty: The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by April 17th, 2012. It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%.

Interest: If you fail to pay by April 17^th deadline, expect to be charged with interest. The interest rate is generally around 8%.

The late payment penalty will not be charged if you can show reasonable cause for not paying on time. Attach a statement to your return and explain the reason in complete

Although it is beneficial and advisable to pay your tax liabilities by the due date in order to stay away from interest and penalties but if for any reason you don’t have enough money to pay your complete tax dues on time, then IRS has a solution for that.

If you cannot afford to pay tax dues on time, then apply for an installment agreement plan. You can make monthly payments through an installment agreement if you're not financially able to pay your tax debt immediately. However, you will reduce or eliminate the amount of penalties and interest you pay and avoid the fee associated with setting up an installment agreement if you pay your tax bill in full.

Before you apply for an installment agreement plan:

• File all required tax returns;
• Consider other sources (loan or credit card) to pay your tax debt in full to save money;
• Determine the largest monthly payment you can make ($25 minimum); and
• Know that your future refunds will be applied to your tax debt until it is paid in full.

An installment agreement allows taxpayers to pay their full tax debt in smaller, more manageable amounts, though penalties and interest continue to accrue on the unpaid portion of that debt. Taxpayers are charged a one-time fee to set up an installment agreement with the IRS.

• $52 for a direct debit agreement;
• $105 for a standard agreement or payroll deduction agreement; or
• $43 if your income is below a certain level.

INSTALLMENT AGREEMENT PLAN REQUIREMENTS

• Apply online if you owe $50,000 or less in combined individual income tax, penalties and interest;
• Call the phone number on your bill or notice;
• Complete and mail Form 9465-FS, Installment Agreement Request (PDF). If you owe more than $50,000, you will also need to complete Form 433-F, Collection Information Statement (PDF).

Avoid default when following the installment agreement plan?

To keep your account in good standing:

• Pay at least your minimum monthly payment when it's due (direct debit or payroll deductions make this easy);
• Include your name, address, SSN, daytime phone number, tax year and return type on your payment;
• File all required tax returns on time;
• Pay all taxes you owe in full and on time (contact IRS to change your existing agreement if you cannot);
• Continue to make all scheduled payments even if IRS applies your refund to your account balance; and
• Ensure your statement is sent to the correct address

In conclusion, don’t be stressed or afraid if you figure out that you are not in a position to pay your tax dues while filing for tax extension (form 4868 or form 7004). Call up IRS or visit their website and apply for payment plan option. If you have been filing your taxes in good faith for the past years and your tax dues do not exceed $10,000 and you are sure that you can pay the entire tax due within 3 years, then IRS will definitely accept your payment plan request.

Find out more information about installment agreement plan.