Congress could well debate the debt ceiling, tax reform and
other important economic issues until the cows come home, but one thing's for
sure: If you don't pay your income taxes – or at least file for an extension –
by April 15, you could be in for a world of financial hurt.
That's because the IRS probably won't give you a break on
the penalties it levies on unpaid taxes unless you were the victim of a natural
disaster, suffered death or serious illness in your immediate family, or
experienced another catastrophic event.
You must file your 2012 federal tax return (or request an
extension) by midnight on April 15, 2013, otherwise the penalty on any taxes
you owe will increase dramatically. You'll be charged an additional 5 percent
of taxes owed for each full or partial month you're late, plus interest, up to
a maximum penalty of 25 percent of the amount owed. (The interest rate
currently charged is 3.22 percent.)
If you file your return or extension request on time, however,
the penalty drops tenfold to only 0.5 percent per month, plus interest.
Here's how it adds up: Say you owe $2,500 in federal income
tax. If you haven't requested an extension, you would be charged an additional
$125 (5 percent), plus interest, for each month you're late in paying off your
bill. Had you filed for an extension, the penalty would drop to only $12.50 per
month (0.5 percent).
Be sure to contact the IRS early if you won't be able to pay
on time so you keep as many payment options open as possible – either call
800-829-1040 or visit your local IRS office. Also check out the IRS'
"Filing Late and/or Paying Late" webpage for helpful information
(www.irs.gov).
One way to avoid this penalty is to pay by credit or debit
card before the filing deadline. You'll pay a convenience fee, which is
tax-deductible if you itemize. Fees vary depending on which payment processor
you choose. (See "Pay Your Taxes by Debit or Credit Card" at
www.irs.gov for details.) If you use a credit card, make sure you can pay off
the balance within a few months; otherwise the accrued interest might exceed
the penalty.
Other payment options include: If you can pay the full
amount within 120 days, you may qualify for a Short-Term Extension. If granted,
you'll still owe interest on your debt, but will avoid the application fee for
an installment agreement. If you need longer than 120 days, an Installment
Agreement lets you pay off your bill in monthly installments. To apply for
either, fill out an Online Payment Agreement Application at www.irs.gov or call
an IRS representative at 800-829-1040. Under certain dire financial-hardship
circumstances, the IRS will allow some taxpayers with annual incomes of up to
$100,000 to negotiate a reduction in the amount owed through an Offer in
Compromise. For step-by-step instructions, read the IRS Form 656 Booklet.
If you're unable to make payments on your installment
agreement or offer in compromise, call the IRS immediately for alternative
payment options, which could include reducing the monthly payment to reflect
your current financial condition.
Also read the IRS's guide, "The What Ifs for Struggling
Taxpayers," which contains helpful information on the tax impacts of
different scenarios such as job loss, debt forgiveness or tapping a retirement
fund.
Jason Alderman directs Visa’s financial education programs.
E files your Ohio
Taxes 2013 & Get Oklahoma
Taxes 2013
