It's time to file your taxes & pay what you can
Monday, May 17, 2021
It's finally here! Tax Day 2021!
Yeah, I know most of y'all aren't that excited. Either you're done with your 2020 return (good for you) or you're struggling to finish it (you can do it!) or, for a variety of reasons (including disaster declarations; so sorry you had to deal with that), you have more time to file.
Today, though, is still a critical deadline for millions of taxpayers, especially those who taxes.
Facing the prospect of having to write the U.S. Treasury a check (or send Uncle Sam an electronic payment) is one of the main reasons folks procrastinate when it comes to their annual tax filing task.
But if you owe, you need to get your Form 1040 to (or on its way if you're snail mailing it) the Internal Revenue Service today, along with at least some of your due taxes, or you'll just find yourself in a worse tax situation.
File by May 17: The most important thing anyone with a tax bill should do today is file a return.
Do so if you can't pay all you owe. Even a partial payment will help. This filing and paying move also applies if you file for an extension.
Whichever you choose, be it Form 1040 for your 2020 taxes or Form 4868 to get five more months to finish your return, sending in the paperwork and payment lets the IRS know that you know your tax circumstances and that you're trying to fulfill your legal obligations.
If you miss today's tax-filing, tax-paying due date, you'll be charged a late-filing penalty of 5 percent of your due amount per month. By sending in a return or extension today with a payment, even if it's not the full amount, you'll reduce that penalty (and interest charges) somewhat.
How to pay what you can: The quickest and easiest way to make a full or partial payment of the tax you owe is electronically.
Two of the most popular e-pay options are:
- Direct Pay, which as the name says, directly transfers the amount from your bank account; and
- Credit or debit card payments.
You can find more on these and other e-pay options in my 7 ways to pay taxes post, as well as at IRS.gov's Paying Your Taxes page.
If you just don't have the cash and your credit cards are maxed out, the IRS suggests you first consider other options, such as getting a loan to pay your tax bill. While I'm not a fan of going into debt for most things, the tax agency has a point in that private loan costs in some taxpayer cases may be lower than the combination of interest and penalties the IRS must charge under federal law for not filing and/or not paying taxes.
Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month of tax due. The IRS-assessed interest rate, adjusted quarterly, on unpaid tax amounts currently is 3 percent per year, compounded daily.
Note the previous paragraph's last two words: compounded daily. If you owe a lot, those charges add up quickly.
Get an IRS payment plans: If getting a loan isn't possible, the IRS might be able to help.
The agency says most individual taxpayers qualify to set up an online payment agreement with the IRS. In most cases, it only takes a few minutes to apply. And applicants are notified immediately if their request is approved.
Even better, online payment plans are processed more quickly than requests submitted with electronically-filed tax returns.
There are two main types of online payment plans. They are:
- Short-term payment plan – The payment period here is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest. A 180-day payment plan is also possible, but it's only available by calling or writing the IRS. Either way, there's no fee for setting up a short-term payment plan, although interest and the late-payment penalty charges continue to apply.
- Long-term payment plan – The payment period for this type of plan, also known as an installment agreement, is longer than the short-term option. These payments are made monthly, and the amount owed must be less than $50,000 in combined tax, penalties and interest.
If the IRS approves a long-term payment plan, a setup fee normally applies. But low-income taxpayers may qualify to have the fee waived or reimbursed.
In addition, for anyone who filed their return on time, the late-payment penalty rate is cut in half while an installment agreement is in effect. This means that the penalty accrues at the rate of one-quarter-of-one percent (0.25%) per month, instead of the usual one-half-of-one percent (0.5%) per month.
Taxpayers who do not qualify for an online payment agreement may still be able to arrange to pay in installments. If this is you, check out the IRS' online discussion on this payment issue.
Other tax-due situations and options: For some, but not all, struggling taxpayers, three other options are available.
Delayed collection is allowed if the IRS determines a taxpayer is unable to pay. In these cases, the IRS can decide to postpone collection until the taxpayer's financial condition improves. However, the total amount owed will still increase because penalties and interest are charged until paid in full. You can request a delay by calling the phone number on any payment notice you might get or by calling toll-free (800) 829-1040.
Penalty relief is offered to some taxpayers who qualify. This determination to reduce or eliminate late-filing or late-payment penalties is made by the IRS on a case-by-case basis. Just how does the IRS decide? It bases its decision on reasonable cause.
Alternatively, where a taxpayer has filed and paid on time during the past three years, the IRS can typically provide relief under the First Time Abatement program. The IRS' special penalty abatement/administrative waiver web page has details on this option.
Offer in Compromise, or OIC, offers eligible taxpayers the option to deal with their tax debt by paying what they realistically can afford. Here, the owing individual proposes a tax settlement amount that's less than the full amount due.
There typically is a $205 non-refundable application fee to make an OIC. However, the IRS usually waives the fee for low-income taxpayers, as well as for offers based on doubt as to liability.
A payment due doubt situation is more than just a taxpayer said/IRS said argument. It's a genuine dispute as to the existence or amount of the correct tax debt under the law. If you have a legitimate doubt that you owe part or all of the tax debt, you will need to complete a Form 656-L, Offer in Compromise (Doubt as to Liability).
The IRS' online Offer in Compromise Pre-Qualifier tool can help you discover whether you're eligible to make the IRS a payment offer.
The bottom line, literally, is pay what you owe or as much as you can by the filing deadline. That, for most U.S. taxpayers, is today, May 17.
And if you live in a state that collects individual taxes, and most do, make sure you take care of those state tax forms and payments, too.
If you don't, you'll likely end up in even deeper debt (or worse) to the tax collector(s).
You also might find these items of interest:
- 5 tax tasks to take care of by May 17
- 10 tax tips for last-minute 2020 return filers
- Get an extension if you can't file your tax return on time
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