Uncle Sam is kind of a crotchedy old geezer. He tends to obsess on the date April 15th and doesn’t take kindly to taxpayers who don’t scratch a check to him in a timely manner. The good news is that your dear old Uncle realizes that not everyone is ready to pay their entire tax bill on the appointed day, so has set up a variety of ways to officially delay or segment money owed. The crucial thing to keep in mind is you cannot simply not pay and not contact the IRS. This can get you in hot water and result in hefty fines or worse.
It’s not uncommon around this time of year for households to experience sticker shock at the size of their federal tax bill. The self-employed are likely candidates, especially if you had a good financial year in 2011 but didn’t adjust your quarterly payments upwards to compensate. The alternate scenario is that you (this applies more generally) had a tough year and simply don’t have the funds to make the payment.
Keep in mind that even if you can’t pay all or part of what you owe, you still must file your taxes by midnight on April 15th, though you do have until April 17th to request a filing extension deadline. If you miss the filing deadline and do not request an extension, typical penalties are 5% of the amount owed per month – plus interest. Of course, requesting and receiving an extension comes at a price as well, but it’s much more palatable – half of 1%, plus interest.
As mentioned earlier, Uncle Sam can be a downright patient creditor but he does not tolerate the silent treatment lightly. Taxpayers who unwisely choose this path can expect to have wages garnished, money siphoned from bank accounts (yes, they CAN do that), and even liens placed on property. The lesson here is simple. Either pay the bill or call the IRS to make alternate arrangements. Just don’t ignore the problem. It will NOT go away. Here are your options.
Short Term Agreement: A short term agreement might your best bet if you think you can pay the total tax bill within 60-120 days. The special number to request this allowance is 1-800-829-1040. Often the IRS will agree to wait that period of time. Yes, penalties and interest will still accrue but it’s less than with a long term agreement.
Payment Extension: The IRS offers a program called Fresh Start intended to help out those who were out of work for at least 30 consecutive days in 2011 or through April 17, 2012, or who were self-employed and suffered a 25% or more drop in income because of the wayward economy. The bottom line with Fresh Start is you have until October 15th to pay your taxes. It’s not entirely a “get out of jail” free card, because you do incur interest on the tax amount, but you might be eligible to avoid penalties. There are income and certain other restrictions, because nobody wants a government program that’s simple and straightforward, but you can get started at the IRS.gov website. Look for Form 1127A.
Pay in installments: If you don’t think either a short term agreement or payment extension quite fits the bill for your individual circumstances, the IRS will likely arrange a monthly payment plan over a 72 month period. The good news is that you might not even have to sacrifice a large part of your day waiting on hold to talk with an agent. If the amount owed is less than $50,000, you should be able to set up an installment agreement online. More than $50,000 requires you to jump through a few extra hoops, and it costs $105 to establish a tax installment arrangement, though that can be reduced to $52 if you agree to have payments automatically deducted from your bank account.
While radio and television are awash with advertisements from private companies offering to negotiate a lump sum settlement with the IRS for less than what you owe (for a fee, of course), the hard facts of the matter are that few compromises are accepted. Private third party companies usually charge steep fees upfront, and the industry is ripe with corruption. The largest tax resolution company in the nation recently filed for bankruptcy after multiple lawsuits over charges it misled consumers and failed to achieve results. The lesson to be learned is this. If you have a tax problem, talk to the IRS. If you aren’t receiving helpful service, consider turning to the IRS Taxpayer Advocate Service, an independent organization within the IRS. Their phone number is 1-877-777-4778.
Good luck out there!
The Solomon Success Team
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