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Financial Fitness & Life Planning

What happens if you cannot pay your taxes on time?

More often this year than in the past, clients have said to me, file an extension, I cannot pay my taxes by April 15.  I have to remind these clients that the "extension" is not an extension of time to pay tax, it's an extension of time to file our tax return. It is used if you do not have all  the information necessary to pepare a complete and accurate  tax return.  Filing an extension of time to file your tax return, or just filing your tax return late can result in large penalties.  There are procedures to request payment extensions and installment agreements to keep the IRS from beginning its collection process. 

If you do not timely file your tax return, a failure to file penalty is assessed at 5% of the balance of tax due each month for a maximum of 25% after 5 months.  If you do not pay the tax when it is due, the failure-to-pay penalty is 0.5% of the balance of tax due per month for a maximum after 25% after 50 months.  If you fail to file and fail to pay, there is a combined penalty of 5% for the first 5 months and then 0.5% for the next 45 months.  This can result in combined penalties of 47.5%.  So, even if you cannot pay the tax liability, you should file your tax return timely.  In addition to the penalties there is interest assessed on the unpaid tax and penalties.  “Borrowing” from the IRS is very expensive.  But it is sometimes, unfortunately, the only solution. 
 
If you have no other source from which to pay the IRS (such as a home equity line of credit), you can arrange an installment agreement by filing Form 9465.  The IRS will allow you to enter into an installment agreement if you meet the following conditions:
 
·         The tax liability is $10,000 or less.
 
·         Within the past 5 years you have not failed to file or pay taxes or entered into a previous installment agreement
 
·         The IRS determines the tax liability cannot be paid in full currently
 
·         The installment agreement provides payment in full within 3 years and
 
·         Compliance with tax laws during the agreement period (timely filing and payment of taxes)
 
If the installment agreement is still beyond your means, you can file for an offer-in-compromise, using Form 656.  An offer-in-compromise may allow you to settle your balance for a fraction of the total amount due.  This option is available only after you have filed your tax return and are unable to pay the tax liability.
 
As you can see, it is important to file your tax return even if you cannot make full payment.  Include a partial payment with the tax return and work with your tax professional to begin one of the processes above.   If you are in a state that has an income tax (such as New York), you may be able to negotiate a settlement with the state in a similar manner.
 
Gary Topple, CPA has more than 33 years of tax, accounting and auditing experience. 
He is a partner in the CPA firm G. R. Reid Associates, LLP. 

gtopple@grrcpas.com
181 Main Street Huntington, NY  11743
631-425-1800 extension 306 Fax 631-425-4656
 
The information contained herein is intended to afford general guidelines on matters of taxation.  Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Unless specifically stated otherwise, the written advice in this article or its attachments is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Readers are encouraged to consult directly with their professional advisors or a professional advisor at G.R. Reid Associates, LLP for advice concerning specific matters.

Today is: November 22, 2017 - 8:34pm
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