Congress could well debate the debt ceiling, tax reform and other important economic issues until the cows come home, but one thing's for sure: If you don't pay your income taxes -- or at least file for an extension -- by April 15, you could be in for a world of financial hurt.
That's because the IRS probably won't give you a break on the penalties it levies on unpaid taxes unless you were the victim of a natural disaster, suffered death or serious illness in your immediate family, or experienced another catastrophic event.
You must file your 2012 federal tax return (or request an extension) by midnight on April 15, 2013, otherwise the penalty on any taxes you owe will increase dramatically. You'll be charged an additional 5 percent of taxes owed for each full or partial month you're late, plus interest, up to a maximum penalty of 25 percent of the amount owed. (The interest rate charged equals the federal short-term rate plus 3 percent -- currently 3.22 percent.)
If file your return or extension request on time, however, the penalty drops tenfold to only 0.5 percent per month, plus interest.
Here's how it adds up: Say you owe $2,500 in federal income tax. If you haven't requested an extension, you would be charged an additional $125 (5 percent), plus interest, for each month you're late in paying off your bill. Had you filed for an extension, the penalty would drop to only $12.50 per month (0.5 percent).
Be sure to contact the IRS early if you won't be able to pay on time so you keep as many payment options open as possible -- either call 800-829-1040 or visit your local IRS office. Also check out the IRS' Filing Late and/or Paying Late webpage for helpful information.
One way to avoid this penalty is to pay by credit or debit card before the filing deadline. You'll be charged a convenience fee, which is tax deductible if you itemize expenses. (Fees vary depending on which payment processor you choose, but typically it's a flat-dollar fee of $2.99 to $3.95 for debit cards, and 1.88 to 3.25 percent of the amount charged for credit card transactions.) Just make sure you'll be able to pay off your credit card balance within a few months; otherwise the interest you accrue might exceed the penalty. To learn more, visit this IRS payment site.
Other payment options include:
- If you can pay the full amount within 120 days, call an IRS representative (800-829-1040) or apply online to see if you qualify for a short-term extension. If granted, you'll still owe interest on your debt, but will avoid the application fee for an installment agreement.
Under certain dire financial-hardship circumstances, the IRS will allow some taxpayers with annual incomes of up to $100,000 to negotiate a reduction in the amount owed through an Offer in Compromise. Note: Very few Offers in Compromise are accepted and you should only pursue that avenue after having exhausted all other payment options. For step-by-step instructions, read the IRS Form 656 Booklet.
If you find yourself unable to make payments on your installment agreement or offer in compromise, call the IRS immediately for alternative payment options, which could include reducing the monthly payment to reflect your current financial condition. You'll likely be asked to provide proof of changes to your ability to repay, so have that information available when you call.
The IRS provides a guide called The What Ifs for Struggling Taxpayers filled with helpful information on the tax impacts of different scenarios such as job loss, debt forgiveness or tapping a retirement fund. For example, many people don't realize that when their income drops, they may become eligible for certain tax credits such as the Earned Income Tax Credit.
One last tip: Double-check your return for accuracy before filing to lessen the need for re-filing and help avoid audits. Common tax-filing errors include:
- Omitting or filling in incorrect/illegible taxpayer ID numbers, filing status, dependent names and Social Security numbers
Ideally you can stay current on your tax payments, but if you fear you may fall behind, know your repayment options before you start racking up penalties.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 17, 2013, go to Practical Money Skills for Life.