In my dentist’s office, there is a sign that says “ignore your teeth and they will go away.” The same is not necessarily true about the IRS and your state income tax department.
If you do not pay your tax by April 15th, you can be subject to late payment penalties.
First things first: file your taxes by the deadline. For individuals, the deadline is generally April 15th. If you need an extension of time to file your tax returns, you can file Form 4868 and whatever form your state requires. (In NY, for example, it is Form IT-370). That gives you an extra six months to file your tax returns, but it is not an extension of time to pay your tax.
If you do not pay your tax by April 15th, you can be subject to late payment penalties. Additionally, if the underpayment is large enough, the IRS and your state will treat your extensions as if they were not filed and also charge you a late filing penalty when you ultimately file your tax returns and alieve your tax liability.
What should my tax payments look like?
The IRS tax system is a pay-as-you-go system. If you are an employee, your employer withholds the tax from each paycheck and remits it to the IRS on your behalf. If you are self-employed and you expect to owe at least $1000 in tax, you instead pay estimated taxes four times per year.
The estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th, and your estimates can be based on the current year’s income tax liability or the prior year’s. If you pay 90% of your current year tax liability or 100% of your prior year tax (110% if your income in the previous year was more than $150,000 or more than $75,000 if your filing status is married filing separately) you can avoid the underpayment of tax penalty.
If you cannot pay your tax when due, file the tax return without payment or with a partial payment. The IRS has a form that allows you to request an installment agreement to pay the tax (Form 9465). Of course, you will be charged interest on the outstanding balance, but the communication makes it clear that you’re not skipping town.
What options do I have if I can't pay my tax liability?
There are some who cannot afford to pay the total amount of the tax even using the installment agreement. The IRS allows qualified individuals to negotiate a settled amount that is less than the tax owed. They key term here is “qualified;” submitting an application does not guarantee acceptance by the IRS. They will look at your financial situation in detail, including all your assets, debts, and sources of income. After the IRS analyzes your financial position, they will not accept an offer if they determine that your tax debt can be paid in full by selling your assets or entering into an installment agreement.
The bottom line is: stay current on your tax obligation by having enough tax withheld by your employer or by timely paying your quarterly estimated taxes, and you can avoid all of this mess.