One impact of the slowing economy was a crunch on cash flows and reduced ability to make estimated tax payments to the IRS. People sometimes refrain from filing because of the taxes owed – then the penalties get even higher. Best to file and then work out a payment plan with the IRS. They are quite reasonable to work with on this issue.
To help taxpayer out, the IRS has expanded its “Fresh Start” initiative to help struggling taxpayers by (1) providing late payment penalty relief to qualifying individuals, and (2) making streamlined installment agreements available to more taxpayers.
Background on late filing and payment penalties.
There is an addition to tax for failure to file a Federal income tax return by its due date, determined with regard to any extension of time for filing previously granted. The addition equals 5% of the net amount due for each month that the return is late, not to exceed 25%. The penalty does not apply if it is shown that the failure to timely file is due to reasonable cause and not due to willful neglect. There’s a minimum penalty for failure to file any income tax return within 60 days of the due date (including extensions), except if due to reasonable cause and not willful neglect. This minimum penalty is the lesser of $135 or the amount of tax required to be shown on the return.
A penalty is imposed on a taxpayer who, without reasonable cause, fails to pay the tax shown on a return by the prescribed date. The penalty is 1/2 of tax shown for each month (or fraction of a month) that it isn’t paid (but not more than 25%).
Background on installment agreements.
The IRS may enter into written agreements with any taxpayer. IRS must enter into an installment agreement requested by an individual whose aggregate tax liability (without interest, penalties, additions to tax, and additional amounts) isn’t more than $10,000, and who hasn’t failed to file or to pay income tax, or entered into another installment agreement, during any of the preceding five tax years, if IRS determines that the taxpayer is financially unable to pay the liability in full when due (and the taxpayer submits information that IRS may require to make this determination). The agreement must require full payment within three years, and the taxpayer must agree to comply with all Code provisions while it’s in effect.
New penalty relief.
IRS is making available to certain wage earners and self-employed individuals a six-month grace period on failure-to-pay penalties. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012. Subject to income and balance due limits, the penalty relief applies for these two categories of taxpayers:
- Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25% or greater reduction in business income in 2011 due to the economy.
A taxpayer’s income must not exceed $100,000 if he or she files as single or head of household ($200,000 for joint filers). The penalty relief is not available to taxpayers whose calendar year 2011 balance due exceeds $50,000.
Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, must be completed to seek the relief. Form 1127-A can be viewed on the IRS website at https://www.irs.gov/pub/irs-pdf/f1127.pdf.
Those qualifying for relief will avoid the penalty until Oct. 15, 2012. However, IRS will charge interest on the unpaid back taxes. IRS reminds taxpayers to file their returns on time by Apr. 17 or file for an extension because the relief does not extend to the failure to file penalty.
More taxpayers may use streamlined installment agreements.
IRS has raised the threshold for using an installment agreement without having to supply IRS with a financial statement from $25,000 to $50,000. This means that taxpayers who owe up to $50,000 in back taxes may enter into a streamlined agreement with IRS that stretches the payment out over a series of months or years. IRS also has raised the maximum term for streamlined installment agreements to 72 months from the preexisting 60-month maximum.