You’re just days away from the IRS’ filing deadline, but you’re still sorting through a mountain of paperwork, dealing with a difficult new client’s demands, and you’ve got a sick kid. Best-case scenario, you’ll have your tax returns all set for inspection by the end of summer. Are you screwed?
Actually, no: That’s what Form 4868 [PDF] is for. This form, if submitted before the normal tax deadline (generally April 15, but extended to April 18 in 2011), will grant you a six-month extension to file your 1040 forms. You’ll also have until your extended deadline to fund any retirement accounts, so it’s not too late to set up an IRA and claim your tax deduction for the year.
Keep in mind, however, that this extension only applies to your return, and not to your bill: If you owe money to the IRS, they want it ASAP. If the IRS discovers that you still owe them more than 10 percent of your tax bill or $1,000 (whichever amount is higher) after the general deadline, you’ll be subject to “failure to pay” penalties of half a percent to 1 percent of the tax owed per month, up to a 25 percent maximum penalty, in addition to an additional 5 percent late filing penalty per month, up to an additional 25 percent. These penalties can really add up, especially if you have a large tax bill, so you never want to ignore payment deadlines.
If you don’t have enough money in your account to pay the full bill, however, you do have other options. The IRS offers an installment plan for taxpayers who are unable to pay their full tax bills when they are due. If you owe less than $25,000, you can use the IRS’ Online Payment Agreement to set up a long-term payment plan. If you owe more than that, you may need to fill out a Collection Information Statement, Form 433F [PDF].
In most cases, though, the IRS’ interest rates on installment plans are so high that it’s well worth your while to find a way to pay your full tax bill immediately. The IRS’ standard monthly interest rate is currently 5 percent, but that could be subject to increase on a quarterly basis. You’ll also pay an additional “failure to pay” penalty of up to 1 percent for every month on the balance owed, plus an initial installment fee of up to $105. Altogether, your interest on a three-year payment plan for a $10,000 tax bill could come to nearly $2,250. Even worse, the IRS may also file a lien against your property while the installment plan is in effect.
If you’re unable to pay your bill on time, the IRS itself recommends getting a bank loan to cover your tax amount. In fact, they even claim that you’re often better off charging your IRS fines on a credit card: Even with an interest rate of up to 13 percent, you could end up paying less in interest than you would under their terms, according to their calculations.
So, to recap: If you can’t finish your paperwork on time, file a Form 4868 before the deadline for a six-month breather. If you can’t pay your full tax bill by the original tax deadline, contribute as much as you can by the deadline — even if that means a loan or credit card charge — to avoid facing steep penalties. If you’re unable to find funding for the total balance, negotiate an installment plan with the IRS, but be warned: It will cost you.