What if You Owe More Taxes Than You Can Pay?
The tax filing deadline is quickly approaching. If you’re mailing your return, it must be postmarked by midnight on Tuesday, April 17th. E-filers also have until midnight on the 17th to submit their returns online.
Filing your return is one thing, but what if you owe the IRS more than you can pay? Filing an extension and not paying isn’t the answer. Remember that an extension is an extension to file and not an extension to pay. If you file an extension you can pay the full amount owed within 120 days. The catch is that interest and penalties will accrue until you’ve paid in full. The interest is compounded daily and is the federal short-term rate plus 3%. The late payment penalty amounts to one half of one percent (0.5%) of the actual tax owed each month.
There are other things to consider. If you meet certain conditions, you can apply for an installment agreement. For low income tax payers, fees apply but may be reduced or waived. It is also possible to make an “offer in compromise”, which, if accepted by the IRS may let you settle your debt for a reduced amount.
It should also be noted that special rules apply for taxpayers living abroad. They have an automatic two month extension to file and pay, although interest will accrue after April 17th until the tax is paid.
If you find yourself in this situation and aren’t sure what to do, reach out to your Herbein tax advisor for help.