WHAT TO DO IF YOU HAVE NO MONEY TO PAY TAXES BY THE APRIL DEADLINE?
IMPORTANT REMINDER:
None of the options discussed in this article excuses you from FILING an income tax return on time by the April deadline. Don’t confuse between FILING and PAYING.
Even if you can’t pay taxes, filing should not be delayed beyond the April deadline as. otherwise, you may be liable to 3 types of punitive charges for late filing, late payment, and interest charges. This will increase your total tax liability. By filing on time you can avoid
the late filing charges at least.
Payment by installment or any other extension discussed is not an automatic right. This is an option that may or may not be allowed at the discretion of the Internal Revenue Service (IRS).
FIRST DETERMINE WHICH OF THE THREE EXPLAINS YOUR REAL SITUATION:
1. No way you are going to be able to make a single full payment nor can pay up even if given an extension for 120 days.
2. You are actually short of money until the April deadline, but will be able to pay up the total tax liability if you get an extension not exceeding 120 days.
3. You are under severe hardship now but should be able to make a single full payment if you get an extension not exceeding 6 months.
BEFORE GOING FURTHER,
WHY PAYMENT IN FULL IS RECOMMENDED IF YOU CAN FIND A CHEAPER SOURCE FOR FUNDS:
Calculate the interest charges you pay if you are taking a loan such as a bank loan and a home equity loan or if you are paying by credit card.
Calculate the payment of service fee, late payment and/or late filing penalty, and interest charges you will be paying to IRS if you opt for IRS installment arrangement.
Determine which of the two is cost effective and convenient for you: Taking a loan to pay the taxes in full or availing the installment payment option offered by the IRS.
If you can pay up the whole tax amount within 120 days, inquire with IRS whether you can be eligible for their administrative extension. This usually avoids a service fee.
NOW LET US DEAL WITH EACH SITUATION!
* SITUATION 1
INSTALLMENT AGREEMENT: WHEN PART PAYMENT IS THE ONLY WAY FOR YOU
You should let IRS know about your inability to pay your taxes without delay and apply for installment agreement. The IRS will respond to your request, usually within 30 days, to advise you as to whether your request has been approved, denied or more information is needed. If approved, usually a service fee will be charged.
(a) TO REQUEST AN INSTALLMENT AGREEMENT, WHEN YOU ARE FILING A TAX RETURN:
If you decide on an installment agreement, your monthly payment should be based on your ability to pay and should be an amount you can afford to pay each month without defaulting.
File your tax return on time AND INCLUDE ONE OF THESE:
– a completed Form 9465, Installment Agreement Request
OR
– your own written request for a payment plan, specifying the amount and the date you can pay each month.
Try to pay as much as you can with the original return to lower the interest and penalty charges. You will need to specify the amount you can pay and the day you wish to make your payment each month (dates 1st-28th only).
(b)TO REQUEST AN INSTALLMENT AGREEMENT IF YOU HAVE ALREADY FILED A RETURN ON TIME WITHOUT PAYMENT:
You probably will get a notice or bill from the IRS requesting payment. Reply to IRS right away if you are unable to pay the full amount. You can apply for a payment arrangement in one of 3 ways:
-request an installment agreement by attaching a completed Form 9465
OR
– write your own written request to the notice and mailing it to the appropriate IRS office
OR
-you can use the Online Payment Agreement (OPA) application (if you owe $25,000 or less only)
As before, you will need to specify the amount you can pay and the day you wish to make your payment each month (dates1st-28th only).
MORE ON FORM 9465:
Entries required include your name, address, Social Security number, your bank details, your employer details, the type of regular return filed (1040 or its variant), the correct tax year, how much you owe and how much you want to pay each month. Your checking account number, your bank routing number and authorization for ACH payment need to be filled in for direct debit payment only.
APPLICABLE FEES:
A one-time installment agreement fee of $105 will be charged when you enter into an installment agreement.
If you agree to pay by Direct Debit from your bank account, the fee is reduced to $52.00.
If your income is at or below 250% of the Department of Health and Human Services poverty guidelines, you can apply to pay a reduced user fee of $43.
The user fee for restructuring or reinstating an established installment agreement is $45 regardless of income levels or method of payment.
PAYMENT METHODS:
You can select from 3 payment methods:
Direct Debit from your bank account, OR
Payroll Deduction from your employer, OR
Monthly check or money order (not suitable if you are apt to forget dates).
Direct debit or payroll deduction installment agreements provide an opportunity to make timely payments automatically and reduce the possibility of default.
For a direct debit installment agreement, you will need to provide your checking account number and your bank routing number authorizing ACH payment. You may include a voided check to the form but it is not mandatory.
To initiate a payroll deduction installment agreement, request your employer to complete and submit Form 2159, Payroll Deduction Agreement. IRS will set up a regular installment agreement as well as a payroll deduction agreement upon receipt of the completed form from your employer.
* SITUATION 2
ADMINISTRATIVE EXTENSION: IF YOU CAN PAY UP WITHIN 120 DAYS
If you cannot pay in full immediately, the IRS offers short-term administrative extensions of time to pay in full from 10 to 120 days. As an encouragement, IRS may be willing to waive their usual service fee.
* SITUATION 3
STATUTORY EXTENSION: IN UNDUE HARDSHIP, YOU WANT TO MAKE A SINGLE PAYMENT WITHIN 6 MONTHS
This is not the same or as straight forward as the above situations. He are you are willing to make the full payment but paying now will land you in undue hardship. If you can prove your difficult situation by submitting all the required documents and attachments, IRS may grant you a statutory extension of time to pay tax for up to 6 months.
But be careful. Undue hardship is not just inconvenience. Undue hardship means substantial financial loss if you pay your tax on the due date. Using this facility as a tax evasion tool will land you in deep trouble.
You will need to submit:
-Form 1127, Application for Extension of Time for Payment of Tax
-A complete statement of all your assets and liabilities at the end of last month
-An itemized list of money you received and spent for three months before you requested this extension.
SOME RELATED ISSUES:
PENALTIES AND INTEREST:
Penalties and interest will be charged on the balance due even if you have an approved installment agreement. This is also the case even if your service charge is waived for administrative extension.
DEFAULTING ON AGREED PAYMENTS:
The IRS expects you to honor your agreed payments promptly. So be careful when you decide on your date of payment. This is especially important when you are mailing your checks. If you neglect or refuse to make payments as arranged or agreed, IRS may take enforced collection action. IRS may file a Notice of Federal Tax Lien and that can adversely affect your credit rating.
PLEASE NOTE: This is a layman’s basic introduction to federal income tax payment extensions that may be requested to the IRS and applies to 2007 taxes only. For more specific information as applicable to individual situations, please consult the following resources or the IRS website. State tax extensions are beyond the scope of this article.
http://www.irs.gov/pub/irs-pdf/f9465.pdf
http://www.irs.gov/pub/irs-pdf/f2159.pdf
http://www.irs.gov/pub/irs-pdf/f1127.pdf
http://www.irs.gov/businesses/small/article/0,id=108347,00.html
http://www.irs.gov/individuals/article/0,id=149373,00.html