During the tax season we all realize sometimes that you might owe taxes and you do not have the cash to pay it. As a CPA a lot of my clients come and they say “I don’t have money right now to pay the taxes that I owe” and their question is:
What should you do in this case??
The worst thing you could do is to put off filing your return because you are afraid of the bill. The Internal Revenue Service penalties for not filing are more punitive than the ones for not paying.
The failure-to-file penalty runs to approximately 5% per month of the balance due, up to 25%.The failure-to-pay penalty is just 0.5% per month of the unpaid tax at April 15th, and even that is cut to half for taxpayers who set up a formal installment plan with IRS. Either way you will also owe interest, currently at 3% per year.
To make it more easy we, the Accountants in Chicago at TaxCutters will give you the following example:
- Let’s consider the case of a taxpayer who owes $2,000 and does not have the money to pay until the end of June;
Case 1: if the taxpayer decides to file a tax return or file an extension by April 15th the total penalties and interest due would be around $50, according to Accountants in Chicago at TaxCutters analysis considering the above rates;
Case 2: if the taxpayer puts off filing until June 30th and pays then, the penalties and interest that he would end up paying would be around $320 according to Accountants in Chicago at TaxCutters.
There are options out there; taxpayers could easily file for a six-months extension using Form 4868. As long as you have paid around 90% of the taxes that you owe by April 15th, the taxpayer will not owe the late-payment penalty. He will however owe interest on any unpaid taxes.
If you have the cash but have run out of time to deal with the paperwork, you can send in an estimated amount in order to avoid some or all of that interest. Similarly if you owe, you could send in a partial payment to cut the interest and penalties.
While the standard advice is to pay the IRS first, that may not make sense. A tax installment payment plan, even with penalties, cost about 6% per year. An installment plan will put your payments on a monthly schedule and cut your penalty on unpaid taxes in half to 0.25%. To set up an installment plan the taxpayer will have to file Form 9465 and pay an application fee of between $40-$110, depending on your income level and weather you are willing to pay through automatic deductions from your checking account or paycheck. However, IRS can reject an installment agreement, but acceptance is guaranteed if you owe less than $10.000, request a payment period of three years or less, you have paid all your taxes for the last five years and the “IRS determines that you cannot pay the tax owed in full when it is due” according to IRS’s rule on installment agreements. For larger tax liabilities, the process gets more complex.
Please call us if you need any help to schedule your taxes for the upcoming dead line, you can reach us at: 773-728-1500!!