The federal tax filing deadline for 2024 is April 15th. Make sure the envelope with your paper return is postmarked on or before that date. If you’re e-filing, do it before midnight on April 15th to avoid penalties. If you expect to miss the deadline, you can file an extension, but that doesn’t take you off the hook for the tax bill. We’ll explain what that means in this article.
The IRS estimates that nearly 19 million taxpayers filed for extensions last year. Some of those were submitted on paper. Others were done using tax software programs. A few were submitted by accounting firms, but most taxpayers using an accountant were better prepared to get their tax filing done on time. You might want to think about that for next year.
We’ve included several IRS links in this article to help you understand federal tax filing extensions, interest on overdue tax balances, and monthly penalties assessed if you don’t pay your taxes on time. You’ll also find links to the IRS forms you need to file for extensions, payment plans, and an offer in compromise if you need one.
How to File a Federal Tax Extension
You can file for a federal tax extension using IRS Form 4868. The simplest way to do that is to fill the form out online using the link we just provided you. You’ll need to enter your name, address, and social security number on the left side (Part I) of the form. The right side (Part II) is where you enter a tax liability estimate, total payments made, and balance due.
Make sure you get the numbers in Part II right. You can use IRS Form 1040-ES and the IRS Tax and Earned Income Credit Tables to calculate your tax liability or you could have a tax preparer handle this for you to ensure it is done correctly and before the deadline. As we stated above, filing an extension does not exonerate you from the tax debt. The bill is still due. If you don’t pay it, interest and penalties will accrue. An extension simply moves the filing deadline up six months to October 15th.
Penalties and Interest Assessed by the IRS
The current interest rate on past due federal tax balances, as of the writing of this article, is 4% compounded daily. The late payment penalty is 0.5% per month, not to exceed 25% of unpaid taxes. The penalty goes down to 0.25% if you have a payment agreement. It goes up to 1% per month If the IRS sends a levy and you don’t pay what’s due within 10 days.
Those numbers probably sound relatively small. They’re not. Compounded interest and penalties on large overdue tax balances can cost you a significant amount of money per year. Many taxpayers take out fixed-rate personal loans to eliminate their tax debt. Do the math on that before you submit a request for an installment plan.
Another way to minimize interest and penalties is to increase your withholding. This can be done through your employer by filing a new Form W4. If you’re self-employed, make sure your quarterly tax deposits are high enough to cover your estimated tax liability for the year. Add extra if you’re unsure. It’s better to have and not need than need and not have.
Asking for an IRS Payment Plan instead of an Extension
A tax extension only pushes the tax filing deadline. It doesn’t help you if you can’t afford to pay what you owe. If that’s the reason you’re waiting to file, you might want to apply for an IRS payment plan instead of an extension. The IRS is usually willing to put you on an installment plan, provided it will help you pay what you owe over a reasonable time.
Requesting a payment plan suspends collection activities and stops any additional IRS actions like levying your property. The IRS charges a setup fee ranging from $31 to $107 depending on how you apply for the plan (online, by phone, mail, or in person). Low-income taxpayers making less than 250% of the federal poverty level can have the fee waived.
Contrary to what you might have heard, the IRS has no interest in taking your house. That only happens in extreme circumstances where people refuse to pay. If you’re willing to work with them, you can set up a payment plan at IRS.gov/payments or by mailing Form 9465, which is their Installment Agreement Request. Read the instructions carefully.
What is an Offer in Compromise?
According to the Wall Street Journal, 18.6 million Americans owed the IRS a total of $316 billion in overdue taxes at the end of 2022. The numbers for 2023 aren’t in yet because we’re still in tax season. Based on the higher interest and inflation rates last year, we’re guessing they won’t be any lower. Simply put, millions of people owe billions of dollars in back taxes.
This economic condition makes the IRS more willing to negotiate with you. Payment plans are one way they do that. Another is an Offer in Compromise. It’s when you ask the government to settle for less than what you owe because you can’t possibly afford to pay it all. The eligibility requirements, forms, and application instructions are available online.
Contact us first if you feel you need to take this step. We may be able to provide you with tax planning that gets you out of the hole you’re in without making an Offer in Compromise. We can also help you file last year’s taxes, submit an extension request, or work out a payment plan the IRS will be willing to accept. Our phone number is 262-253-9955. Call us today.
