With tax filing deadline fast approaching, it is important to consider that filing on time is the first step to avoid paying penalties and fees. Due to the changes in tax law, many taxpayers did not make adjustments on W4’s to their withholdings and consequently were negatively impacted when the refunds did not come at the expected amounts. Even worse is the situation where instead of a refund, a taxpayer owed money.
Anyone expecting a refund and having a tax liability instead is usually ill-equipped to handle it. If that’s you, remember that just because you owe the IRS money, it doesn’t mean that postponing dealing with the issue will make it better. In fact, it makes it a whole lot worse.
First of all, you are still required to file your return. Not doing it on time triggers Failure to File penalty and potential interest on the amount you owe. Arguably the best option is to file taxes electronically or file for extension. These options help you avoid late filing penalties. Requesting an extension to file tax returns is usually automatic and gives you additional six months to figure out the next step.
The bigger problem may be if you have to make a payment you didn’t anticipate. The IRS works with taxpayers and offers the following solutions:
- Taxpayers who owe less than $50,000 may qualify for Online Payment Agreement; you can set up this payment plan on the IRS.gov and receive an immediate confirmation whether or not your request was approved; the same applies to businesses that owe less than $25,000 in payroll taxes and have filed all tax returns.
- Installment Agreement allows for a direct deposit or payroll tax deduction
- In certain circumstances taxpayer can qualify for Delayed Collection until the financial conditions of the taxpayer improve.
- Offer in Compromise allows taxpayers enter into agreement with the IRS and settle the tax obligation for a lesser amount.
- Failure to File
- 5% per month for each month the tax return is late.
- 25% is the maximum penalty.
- Percentages are based on the amount of tax you owe.
- Failure to Pay
- ½ of 1% per month.
- Cannot exceed 25% of the total amount of tax due.
- Based on the amount of tax you owe.
- The maximum combined amount of penalties for the first 5 months is 25%.
How to make a payment
It all depends how you file your taxes. Online tax software, many of which you can use for free, have a built-in payment system. The most common option is making a payment by providing your bank account information at completion of the return. Alternatively, the IRS offers IRS Direct Pay to make free electronic payments. This service also allows making quarterly estimated payments. Finally, you can mail a check payable to the U.S. Treasury.