April 15: A day of dread.
People rush to complete their forms and race to the post office to mail their forms, only to discover that a long line awaits them. If you get your envelope postmarked before midnight, you're in the clear, nothing to worry about.
But what if you didn't beat the deadline? What if you forgot to file? Or what if you couldn't file because you didn't have all the necessary information to fill out your Form 1040? Even worse, what if you owe thousands of dollars more than you thought you would, because you claimed too many exemptions on your W-4, and there is just no way you can pay it all right now?
Luckily -- or unluckily, in some cases -- the IRS has seen every one of these situations and can tell you what to do about it.
There are many solutions to these problems, and this article will explain how to file for a filing extension and an installment agreement. We'll also discuss the consequences of paying late: penalties and interest.
First, we'll take a look at how to file for a federal income tax filing extension. Read all about it on the next page.
Paperwork Needed for Filing Tax Extensions
Some people in the United States file their federal income tax returns before April 15 -- sometimes long before. Others file their returns at 11:50 p.m. on April 15.
But you may need even more time. If you haven't received all of your 1099 or W-2 forms -- records of how much income you have received from various sources -- you may not have all the numbers you need to fill out your 1040. Or maybe you don't have the numbers from your 1098 interest forms. Or maybe your tax return is just enormously complicated and you haven't had time to work on it.
Whatever the case, the worst thing you can do is to not file for an extension. Fortunately, it's really very simple: Fill out IRS Form 4868 and mail it in by April 15.
Filling out Form 4868, available on the IRS website, can give you an extra six months to file most federal income tax forms, including the 1040, 1040A, 1040EZ, 1040NR and 1040NR-EZ. If the IRS grants you an extension, your new filing deadline becomes October 15.
Form 4868 is simple, a mere nine lines long. You'll need to provide:
- contact information, including your Social Security number (and your spouse's, if applicable)
- your estimated tax liability -- that is, what you think you will owe
- the amount you can pay now
The IRS highly recommends making a payment on your estimated tax liability when you file Form 4868, because a filing extension is not a payment extension. Any tax you owe begins to accrue late payment penalties and interest after April 15. If you can't pay all of it, you have the option of paying whatever you can manage at the time. Every little bit helps reduce penalties and interest.
If you don't have enough money in your bank account to pay the estimated tax, you have the option of paying taxes by credit card. Of course, whether this is wise depends on your financial situation and your credit card's interest rate.
Oops. You didn't file on time, and you didn't file for an extension. What will the IRS do to you? Read on.
Penalty for Late Payment of Income Taxes
Back in high school, when you turned in a term paper late, your grade was probably reduced by your tardiness. The Internal Revenue Service operates on the same principle.
Even if you only need an extra week to file your return, use Form 4868 to file for an extension. A week may not seem like much, but you're better off avoiding the late penalty. U.S. taxpayers who live and work abroad have an automatic two-month extension to file their tax returns, putting their filing deadline at June 15. They do not have to file Form 4868, but when they file their returns in June, they must include proof that they do indeed live and work abroad. Note that for this extension, Puerto Rico does not count as "abroad." The IRS also extends an automatic 180-day extension to military personnel serving in combat zones and a one-year extension to victims of a "Presidentially declared disaster or a terroristic or military action" [source: IRS].
As mentioned, filing an extension does not suspend interest from accruing on your tax liability, nor does it necessarily prevent penalties for not paying by the due date.
The IRS assesses a late-payment penalty if you do not pay 90 percent or more of your unpaid tax by April 15, even if you file Form 4868. For example, let's say you owe $5,000 in taxes:
">$5,000 x 0.90 = $4,500
If you don't pay at least $4,500 when you file Form 4868, the IRS will assess a late-payment penalty. The penalty is 0.5 percent of the amount you owe per month. This penalty continues until you have paid the maximum 25 percent penalty. Using the example above, the late-payment penalty would be:
$5,000 x 0.005 = $25 per month up to 25 percent, or $1,250
So the sooner you pay off the unpaid taxes, the less you will pay in penalties.
If you file your tax return on time and apply for an installment agreement, the IRS reduces your late-payment penalty to 0.25 percent per month.
$5,000 x 0.0025 = $12.50 per month.
If you do not apply for the filing extension, the late-filing payment fee is 4.5 percent of the unpaid tax per month up to five months.
$5,000 x 0.045 = $225 per month
In addition to late-payment penalties, any tax you owe after April 15 will accrue interest. Remember, a filing extension is not a payment extension. This interest, which is compounded daily, will continue to accrue for as long as you owe tax. As with late-payment penalties, the sooner you pay off the tax, the less interest you'll pay.
The interest rate on unpaid tax is "the federal short-term rate plus 3 percent." As of the second quarter of 2008, the interest rate on unpaid tax (for individual taxpayers, not businesses) is 6 percent [source: IRS].
Let's take the above example again, in which you owe the IRS $5,000. We'll calculate the interest for one month.
$5,000 x .06 = $300
Penalty + Interest
$25 + $300 = $325
So you would owe $325 for every month you don't pay on top of the $5,000 in taxes you already owe the IRS. Now, this simple example doesn't take into account any payments you make on your tax during the year, but it should give you an idea of how large tax debt can grow and grow. And making payments on your unpaid taxes is what an installment agreement is all about. Check it out on the next page.
Income Tax Installment Arrangements
If you can't pay the total amount of income tax you owe, you can file Form 9465 to break the unpaid amount into monthly installments.
Like Form 4868, Form 9465 is not very complicated. The information you need to provide consists of:
- your contact information, including Social Security numbers for you and your spouse (if applicable)
- contact information for your bank
- contact information for your employer
- the amount you owe
- the amount you can pay now
- a suggested amount for your monthly payment
- a suggested monthly due date for your payment
- bank account information (if you want your installments to be debited directly from your bank account)
The IRS is obligated to accept your installment agreement if:
- you owe less than $10,000
- you have filed on time every year for the past five years
- you are not currently engaged in an installment agreement
- you can prove that you are unable to pay the full tax immediately (record of credit card debt, living expenses, et cetera)
- you consent to a three-year (or shorter) term
If you don't meet these qualifications, the IRS may adjust the terms of your installment agreement.
The fee for setting up an installment agreement is:
- $52 if you set up an automatic debit agreement
- $105 if you will be paying manually (sending in payments by mail or online)
- $43 for eligible low-income individuals (your income is 250 percent or lower than the poverty level set by the Department of Health and Human Services)
If you are supposed to get an income tax refund in any tax year while you are making payments on an installment plan, your refund will be applied toward what you still owe the IRS. Yes, the IRS will get its money.
As with any other debt, missing a payment or multiple payments can make for a bad day. Not paying could put you in danger of defaulting on the installment agreement. And when the IRS does not get its money, it goes after its money.
The IRS will send you a Notice of Federal Tax Lien when it has acquired the right to seize your personal property (your house, your furniture, your antique galleon). When the IRS sends you a Notice of Federal Tax Levy, it will grab your property and auction or sell it to satisfy your tax debt.
The two things to remember in your dealings with the IRS are deadlines and payment. Pay what you owe on time, whether on an installment agreement or not, and you'll be fine.
If you'd like to know more about filing extensions and related topics, follow the links on the next page.
Related HowStuffWorks Articles
More Great Links
- IRS. "A Guide to Information Returns." http://www.irs.gov/efile/article/0,,id=98114,00.html (Accessed 4/25/08)
- IRS. "Are there Fees to Set Up an Installment Agreement?" http://www.irs.gov/businesses/small/article/0,,id=156479,00.html (Accessed 4/21/08)
- IRS. "Form 4868." http://www.irs.gov./pub/irs-pdf/f4868.pdf?portlet=3 (Accessed 4/25/08)
- IRS. "Form 9465." http://www.irs.gov/pub/irs-pdf/f9465.pdf (Accessed 4/25/08)
- IRS. "Frequently Asked Tax Questions And Answers - Keyword: Installment Agreement/Payment Plan." http://www.irs.gov/faqs/faq-kw93.html (Accessed 4/21/08)
- IRS. "Patriot's Day Gives Some Taxpayers an Extra Day to File and Pay Taxes." 2/27/06. http://www.irs.gov/newsroom/article/0,,id=154808,00.html (Accessed 4/25/08)
- IRS. "Payment Plans, Installment Agreements." http://www.irs.gov/businesses/small/article/0,,id=108347,00.html (Accessed 4/21/08)
- IRS. "Topic 202 - Tax Payment Options." http://www.irs.gov/taxtopics/tc202.html (Accessed 4/21/08)
- IRS. "Topic 204 - Offers In Compromise." http://www.irs.gov/taxtopics/tc204.html (Accessed 4/21/08)
- IRS. "Topic 301 - When, Where, and How to File." http://www.irs.gov/taxtopics/tc301.html (Accessed 4/21/08)
- IRS. "Topic 653 - IRS Notices and Bills, Penalties and Interest Charges." http://www.irs.gov/taxtopics/tc653.html (Accessed 4/21/08)
- IRS. "What Happens If I Miss an Installment Payment?" http://www.irs.gov/businesses/small/article/0,,id=156483,00.html (Accessed 4/21/08)
- Lipsman, Ron. "Financial Calculator." from You Can Do the Math. Praeger Publishers. 9/30/04. http://www.fintrend.com/ftf/calculators/compound_interest_calculator.asp (Accessed 4/25/08)
- Schnepper, Jeff. "It's OK to file for an extension." http://articles.moneycentral.msn.com/Taxes/PreparationTips/ItsOKToFileForAnExtension.aspx (Accessed 4/21/08)
- Wiener, Leonard. "Hurry Up! Tax Tips at the 11th Hour." U.S. News & World Report. 4/14/08. http://www.usnews.com/articles/business/your-money/2008/04/14/hurry-up-tax-tips-at-the-11th-hour.html (Accessed 4/21/08)
- Wiener, Leonard. "Hurry Up! Tax Tips at the 11th Hour." U.S. News & World Report. 4/14/08. http://www.usnews.com/articles/business/your-money/2008/04/14/hurry-up-tax-tips-at-the-11th-hour.html?PageNr=2 (Accessed 4/21/08)
- Yahoo Finance. "How to File an Extension." http://finance.yahoo.com/how-to-guide/taxes/16220 (Accessed 4/21/08)