If you are not ready to file your taxes, file an extension to avoid a monthly 5% failure-to-file penalty, which will pile up until you’ve been charged 25% of what you originally owed. After that, you’ll be charged interest until you settle your account (the current monthly rate is 0.75%, and this can change quarterly). The IRS will automatically approve any request for an extension, giving you until October 15th for get your taxes together. File Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) by April 15th. It only takes a minute — seriously — so don’t procrastinate! You don’t need to have a reason for extending, and signatures are not required (if your spouse is out of town, no problem).
Find a Way to Pay
Filing a tax extension won’t automatically buy you time on paying what you owe. If you’re ready to file but can’t pay, you don’t need to file an extension; file and just pay what you can for now, or set up a payment plan.
You might have considered using a credit card to pay your tax bill, but you’ll be charged a fee of 1.88-2.35% for using credit, and potentially more (up to 3.93%) if you E-file. For example, if you owe $5,000 in taxes, that’s a fee of up to $196.50, plus your monthly credit card interest. Yikes. A better option is to request permission from the IRS to make installment payments on your tax bill. Do this by filing Form 9465 (Installment Agreement Request) with your 2012 return by April 15. You can generally suggest your own terms for installments, within reason. For example, if you owe $4,000, you might offer to pay $200 on the first of each month. Approval is generally automatic if you owe $25,000 or less and propose a repayment period of 60 months or less. Your request will be approved or rejected officially within 30 days of filing.
On approval of your installment plan, you’ll be charged a $105 “setup fee” (or $52, if you arrange for automatic withdrawals from your bank account). You’ll be charged interest (currently at 0.5% a month), which is probably much better than what you’ll get with other lenders. Do keep in mind that, while the government is willing to help with your 2012 liability, it won’t agree to defer payments for later years while you’re paying the 2012 tab; if you are still paying off your 2010 tax bills, forget about an installment deal for 2012.
If your income decreased, in 2012, you may be newly eligible for the Earned Income Tax Credit. If you earned less than $50,270 in 2012, check to see if you qualify; some workers could receive as much as $5,981. Eligibility depends on your earned income and family size, but single people and people without kids are eligible, too. The online EITC Assistant can help you quickly determine your eligibility; find out if you qualify, then file accordingly.
The worst thing you can do when it’s time to file and pay your taxes is to do nothing. Extensions are simple, and if you can’t pay what you owe, consider your options wisely and take action in a timely manner.