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.

Benefits to file tax extension forms 4868 and form 7004

Every year brings with it new hassles of tax season filing. Most of the time tax payers are unable to get their income tax returns filed on time and even if they do try their level best they end up filing tax return with incorrect information or else missing information, which results in more tax liability and penalties. Hence, to safeguard taxpayers from such troubles, IRS came up with tax extension forms which allow taxpayers to extend their tax dates in order to get more time to file their income tax return.

Both individuals and businesses can file for tax extension forms. Individual who want to get their tax return date extended should use form 4868 and business should use form 7004. The last date for individuals to efile form 4868 is April 17th 2012 and for business tax extension form 7004 is March 15th 2012. Businesses have the option to either file for 5 month extension or 6 month extension. Business tax extension instructions will shed more light on your form 7004 filing.

Many people believe that filing for tax extension will lead to more penalties, IRS doe not approve of it, they will end up being audited by the IRS and etc. However they all are simply myths. On a brighter note, tax extension filing is recommended and provides many benefits to tax payers. Let’s focus on the benefits of tax extension filing:

6 extra months to prepare and file income tax return – Most people find it impossible to get their taxes filed on time. They either have not received all the tax documents necessary to accurately file tax return or simply don’t have time for taxes. In that case, filing for tax extension is the best option. It provides 6 more months for tax payers to collect all their tax documents and file correct and accurate tax returns. Tax extension also provides extra time to file gift tax return. Considering April 17th 2012 to be the last date to file tax return forms, hence an extension provides till October 15th 2012 to complete your tax returns.


Tax extension eliminates the risk of late filing penalty – If you apply for tax extension by the due date which is April 17th 2012, then you will NOT have to face late filing penalty which is 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%.


Tax extension eliminates the Risk of IRS audit – When does IRS calls for an Audit? When your returns were incorrectly filed, or there was some missing information or you did not file a tax return at all. However, with tax extension you get more time to complete your filing, hence reducing your chances of getting audited by IRS.


Tax extension reduces tax preparation fees – During tax season, tax professionals and CPAs raise their fees and reduce them only when the tax filing season has gone, hence taxpayers have to pay more to get their taxes filed by April 17th 2012. If you want to save on your filing charges, then opt for tax extension. This will allow you to file tax returns through tax professionals when their charges have been reduced.


Although Tax extension has many benefits, however there is one thing all must remember. Filing an income tax extension does not allow more time to pay your tax liabilities due. You can get your tax returns extended by using efile form 7004 or form 4868, however if you have any tax dues, make sure you pay them by the income tax due date which is April 17th 2012, in order to prevent any late payment penalties.