If you haven’t filed your taxes because you owe money, it may be a costly mistake, financial experts say.
That’s because the late filing penalty for federal taxes is 5% of your unpaid balance per month capped at 25%, whereas the late payment fee is 0.5%, said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.
However, you may avoid the failure to file penalty by submitting your return or filing an extension by the deadline — April 18 for most taxpayers. And you may reduce your late payment fee by remitting what you can afford.
If you still can’t pay your bill after filing your return, you may qualify for other payment options, Harris said.
“The IRS is willing to work with you,” said National Taxpayer Advocate Erin Collins during a Feb. 17 Senate Finance Committee hearing.
1. Installment agreements
One choice is applying for an installment agreement, a long-term monthly payment plan through the IRS.
You may qualify if you owe $50,000 or less, including tax, penalties and interest, but the agency won’t approve the plan with unfiled returns.
Of course, you’ll want to agree to an affordable monthly payment, and you’ll need to pay future taxes on time to avoid defaulting on your agreement, the Taxpayer Advocate warns.
“It’s a very quick process,” said Collins, explaining you can apply online, by phone or through a bot.
2. Offer in compromise
Another option, known as an offer in compromise, may allow you to settle for less than you owe. However, the IRS encourages taxpayers to explore “all other payment options” first.
“If you can show that you have financial challenges, you may be able to reduce the liability and settle it with finality to put the tax behind you so you can move forward,” Collins said.
To qualify, you need to be current on all returns, unless there’s a valid extension on file, and up-to-date with required estimated tax payments.
3. Currently not collectible
There’s also a “currently not collectible” status, where the IRS may back off from trying to receive unpaid balances for a period of time, Collins explained.
However, if approved, your outstanding debt may still accrue penalties and interest, and the IRS may use your future refunds to cover the balance, according to the Taxpayer Advocate. And you’ll need to stay current on future taxes.