Can't File Your Tax Return or Make Your Tax Payments on Time?

With April 15 approaching, you may feel crunched for time to figure your taxes, finding the money to pay them, or both. Perhaps your records are a mess and you just don't have time to figure out what to put on every line of every schedule. Or perhaps you've just taken a first look at your taxes, and it's not good news. You owe more than you had withheld, more than you paid in estimated tax, more than you can afford to pay.

"The one thing that can make a bad situation worse is not filing your return...That brings on a failure-to-file penalty, in addition to possible penalties and interest for failure to pay," said Mark Luscombe, CCH principal federal tax analyst. "It's smart to file even if you can't pay, and pay even if you get an extension to file."

If you aren't able to fill out a complete return - because you need more information or more time to cope with the information you have - you should file for an extension, using Form 4868 (which gives you a six-month extension until October 15, 2009). You should also estimate your tax liability and pay as much of it as you can by the April 15 due date.

"With an extension, you can get more time for filing, but you will owe interest on any underpayment...If you underpay by more than 10 percent, you may be subject to a penalty," Luscombe noted. "In addition, if you're due a refund or the stimulus rebate, you won't get them until after you actually file your return."

Failing to get an extension, or not filing your return by the extended date, can subject you to a failure-to-file penalty. The penalty is whopping 5 percent of the tax due for every month or any fraction of a month that the return is overdue, capped at 25 percent. However, there is a minimum penalty for any return not filed within 60 days of the due date (plus any extensions) of $100 or 100 percent of the tax due, whichever is less.

"The bottom line is that if you don't file, you'll almost certainly pay more in the end, and you aren't likely to sleep very soundly knowing that the IRS may be looking for you, either," Luscombe said.

If you can't pay your entire tax bill with what money you have at hand but can pay the full amount within 120 days, you can ask the IRS for a short-term administrative extension by calling 1-800-829-1040.

If you need more than 120 days to pay your taxes, there are two options for paying off your full tax debt over time - using a credit card or arranging an installment agreement with the IRS.

For several years now, it has been possible to pay your taxes with a credit card, and there are some advantages to taking this route according to CCH. One is that the "convenience fees" of 2 to 3 percent charged by the IRS for making the credit card transaction may be lower than the fee charged by the IRS for setting up an installment agreement. Another is that you may earn frequent flyer miles or other perks by using your credit card. If you owe a relatively small amount and if you pay it off within a few months, the total costs can easily be less than if you deal with the IRS directly.

All credit card payments have to be made electronically, through personal tax software, a paid tax preparer or through credit card service payment providers that you contact by phone or over the Internet.

There are some good reasons to consider installment payments with the IRS. One is that costs can be lower in the end because the IRS charges relatively low interest rates on installment payment agreements. The other is that you may be able to convince the IRS to accept less than the full amount due - a so-called "offer in compromise."

The recently passed American Jobs Creation Act now permits the IRS to enter into installment agreements for less than full payment. Thanks to a 1998 law, the IRS is required to accept installment payments if you have a good filing and payment record, the amount owed is not more than $10,000 and it can be paid off within three years, but they can charge you interest, which varies with the federal short-term rate and is adjusted quarterly. Also, they can assess a 0.25-percent penalty for failing to pay in any month the installment payment is in effect. Any installment agreement that the IRS is required to accept must still be for full payment.

The "good filing and payment record" means you've filed and paid your taxes on time for the last five years and that your current withholding and estimated tax payments are sufficient to cover taxes for the current tax year.

You apply for an installment agreement on Form 9465, detailing the amount you owe, the monthly amount you propose to pay and the date of the month (no later than the 28th) on which you'll make the payment. You'll be charged a one-time fee, usually $52 or $105, when the IRS accepts your installment payment agreement. The lower fee is for a direct-debit arrangement. (People who fall beneath poverty guidelines pay a $43 fee.)

If you owe $25,000 or less in taxes, interest and penalties, you can set up a payment agreement online, but the IRS can have a say in the amount of your monthly payment.

If you owe more than $25,000 in taxes, interest and penalties, you may be able to set up an installment plan, but you have to file Form 433F, "Collection Information Statement," in addition to Form 9465.

You can have installment payments made directly from your paycheck. You have to call the IRS at 1-800-829-1040 to set up this payment option.

Offers in compromise normally arise because you convince the IRS that the tax debt in its entirety could never be collected or there's a dispute between you and the IRS as to how much is actually owed, but neither party wants to enter into a legal battle to resolve the issue. You may be able to work out an offer in compromise if you can convince the IRS that collecting the debt in full would impose an undue hardship. Be prepared to you're your financial soul when applying for an offer in compromise on Form 656 and truly make a serious offer.

The IRS has indicated that it will have little patience with taxpayers who propose settling their tax debts for "pennies on the dollar" and warns that many unscrupulous promoters are urging people to make such offers, while charging them excessive fees for their dubious advice.

There's a $150 fee charged for offers in compromise. People who fall below certain income levels based on Department of Health and Human Services poverty guidelines can ask for a waiver with an "Application Fee Worksheet," which is now included in the basic offer-in-compromise package.

You must make an initial payment with your offer. If you are proposing to pay in five installments or fewer, you have to include 20 percent of the total amount you propose to pay when you submit the offer. If you propose a longer payment period, you have to include an amount equal to your first payment under your proposed plan. You must also continue to make payments in accordance with the proposed plan while the offer is being considered.

The IRS has announced that it will try to go easy on people who can't keep to their original installment agreements of offers in compromise due to a change in their personal finances. Anyone having difficulty is advised to call the IRS at 1-800-829-1040.

"There may be real help for people, but the IRS has not revealed just how far it will go to accommodate taxpayers in difficulties before they resort to measures such as liens and levies," Luscombe said.

CCH Group, a Wolters Kluwer business, is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913.