Filed an Extension? Here's What You Need to Know

When the taxman cometh, it's already too late.

Ignoring your federal taxes is never a good idea. Even though the IRS is suffering from budget cuts, the agency will still diligently calculate all applicable fees and penalties delinquent taxpayers owe.

Struggling taxpayers may feel that they have no options available. The reality is that the IRS offers several options for people needing a filing extension or having difficulties meeting their tax obligations. Here are six steps that you can take to lessen the tax blow.

1. Double Check for Automatic Filing Extensions

Not all late tax filers fail to meet the deadline on purpose. Some of us have legitimate reasons, such as military deployment, that render us unable to pay our taxes on time. The IRS grants an automatic filing extension to the following groups:

  • U.S. citizens and green card holders abroad. When living and working abroad, you have until June 16th to file your federal taxes. However, payment of taxes is still due April 15th.
  • Members of the armed forces serving in combat zones. As an active member of the U.S. Armed Forces, you can wait until at least 180 days after you leave the combat zone to file returns and pay any taxes due. For more details, refer to the Extensions of Deadlines in Publication 3, Armed Forces' Tax Guide.
  • Victims of certain recent natural disasters. Check this list from the IRS for approved tax relief for disaster situations, such as the March 2014 mudslide in Washington and Hurricane Sandy.

2. File an Extension

If you aren't part of any of the three groups who enjoy automatic filing extensions, you can use the Free File service from the IRS to electronically request an automatic tax-filing extension on Form 4868. This extends your filing extension to October 15th.

Don't underestimate the late filing penalty. It's 5% of the amount due for each month (or part of a month) your return is late. The maximum penalty is 25%. For returns 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller.

If you feel that you have a valid reason for filing late, attach a statement to your return. In some cases, the IRS may waive the late filing fee.

3. Minimize Late Payment Fees

While you get an extension for filing taxes, your deadline to pay due taxes is still April 15th.

The good news is that by filing an extension before or on April 15th, now you only pay a monthly penalty of half of 1% of any tax not paid by April 15th, instead of the default 5%.

You don't have to pay late penalty fees if you can prove reasonable cause for paying taxes late. According to the IRS, if you pay at least 90% of your actual 2014 tax liability by April 15th, then you have reasonable cause and won't be charged late penalty fees. Paycheck withholdings, estimated tax payments, and payments made with Form 4868 count towards that 90%.

Now that you have minimized late filing and late payment fees, let's tackle that debt to Uncle Sam.

4. Set Up an Online Payment Agreement

If you owe $50,000 or less in combined individual income tax, penalties, and interest, have filed all required returns, and can pay the full debt within 120 days, you're eligible to apply for an online payment agreement with the IRS.

To apply you'll need:

  • Your name
  • Valid email address
  • Address from most recently processed tax return
  • Date of birth
  • Filing status
  • Your SSN (or spouse's if filed jointly) or ITIN

The IRS charges no fee to file this short extension of time to pay. Generally, taxpayers that are granted the 120-day extension pay less in penalties and interest that those that request longer payment agreements.

5. Request an Installment Agreement

Depending on how much you owe to the IRS, you may not be able to pay your debt within 120 days. In that case, you need to request an installment agreement through Form 9465, Installment Agreement Request and Form 433-F, Collection Information Statement.

Here are some important points to consider about installment agreements:

  • The standard fee to set up an installment agreement is $120; $52 if you agree to automatic payment withdrawal from your bank account, or $43 if your income is below a certain level.
  • To avoid default, pay your minimum monthly payment by its due date.
  • If your agreement goes into default, you may be charged a reinstatement free.
  • Include your name, mailing address, Social Security number, daytime phone number, and return type on each one of your payments.
  • Your entire balance is due within 72 months.
  • Any future refunds will be automatically applied towards your balance until you pay your debt.
  • Even if you have future refunds, continue to make your scheduled payments.
  • If you move and have an unpaid balance, notify the IRS with Form 8822, Change of Address to avoid missing any bills or notices from the IRS.

Keep in touch with the IRS. Contact the agency at 1-800-829-1040 if you have any questions about any bill or notice, or if you know that you won't be able to meet a minimum monthly payment.

6. Last Resort: Payment Extension or Offer in Compromise

When you feel that you're running out of options, you still have two final courses of action.

First, in the event that you feel that you have an undue hardship, meaning you would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date, you can submit Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship.

Under the IRS Fresh Start Initiative, qualifying individuals can request an extension of time to pay and have late payment penalties removed. The IRS generally limits payment extensions to six months, except under very special circumstances.

Second, in the very worst case scenario that you can't commit to an installment agreement and that you feel that a time extension wouldn't be helpful, you can submit Form 656, Offer in Compromise.

Under this scenario, the IRS would settle your tax debt in a lump sum totaling less than you owe. To help determine your eligibility, use the IRS's Offer in Compromise Pre-Qualifier. Keep in mind that the IRS requires all Form 656 applicants a non-refundable $186 application fee and an upfront, non-refundable partial payment.

Form 656 should be your very, very last resort because the IRS approves few offers in compromise.

Act Now

Take your tax obligations seriously. If you cannot make a payment, contact the IRS immediately. Unless you notify the IRS about why you can't meet a payment, the organization is legally allowed some pretty nasty enforced collection actions, such as seizing your property until you pay your tax debt.

There is no tax beast that can't be tamed.

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