If you think you are not going to be able to file your taxes on time, doing nothing is not an option. Here is what you need to know to avoid getting penalized by the IRS, which could cost you much more than you owe.
If you’re going to miss the tax filing deadline, file a free extension
Many people don’t realize that the IRS will allow you to file late. The HUGE point you need to remember is you need to notify them in advance by filing an extension and do so by the same date you are required to file your taxes (April 18, 2023, for the 2022 tax year filing deadline). You can also use IRS Free File to electronically request an automatic tax filing extension.
The extension of time to file a return will give you six extra months to get your paperwork together, extending the time until October 15.
There will be NO PENALTY for filing late if…
If you have filed an extension form with the IRS, you will not be penalized for filing late as long as you don’t owe them any money. This means you expect to not owe any additional taxes other than what you have already paid in (or not), or you expect the IRS owes you and you will be receiving a refund.
The #1 thing you need to know: You can’t extend the time to pay
Simply put: You can extend the time to file, but you cannot extend the time to pay. If you owe the IRS money, you must pay them by the tax filing deadline. However, you do have some options, which you’ll find below. But first…
If you do not pay all of the tax you owe by the filing deadline (April 18 in 2023), you will likely owe a late payment penalty that accrues at 0.5% per month, or fraction thereof, until the tax is paid, according to TurboTax.
You will also be charged a late filing penalty of 5% of the unpaid tax per month, plus interest, with the maximum late filing penalty capped at 25% of the amount due.
What to do if you can’t pay your taxes
If you don’t think you can pay, there are basically three options available to you:
1. Use a credit card to pay off what you owe.
2. Make an agreement with the IRS to pay a certain amount each month in installments.
If you owe $50,000 or less, (including tax, penalties, and interest), you can set up an installment plan with the IRS online. If you owe a larger amount, you will have to call the IRS to make arrangements.
3. Make an “offer in compromise” with the IRS.
An IRS offer in compromise is similar to debt consolidation, where you negotiate with the IRS to accept less than what you owe, and could significantly knock down the total amount due, CNBC reports. However, the IRS will want to be sure you have explored “all other payment options” first.