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Tax time – A reminder of the basics

CarleeMcCullough-160We are quickly coming upon the deadline that many Americans not receiving a refund truly despise – April 15, the last day to file individual tax returns.

With Benjamin Franklin's admonition in mind – "...nothing is certain but death and taxes" – and serving as point of reference, here are some basics to help out those who have not yet done their tax duty.

Importance of filing on time

When you owe taxes to the Internal Revenue Service (IRS), it is imperative that you file and pay on time or you may be subject to penalties and interest on the amount due. However, if you have a refund coming, there is no penalty for filing late.

Types of penalties

Failure to file Penalty: This penalty is calculated based on the time from deadline of the tax return due, which may include extensions to the date the return is actually filed. The penalty is 5 percent for each month the tax return is late, up to a total maximum penalty of 25 percent of the tax due as shown on the tax return filed.

Failure to pay penalty: This penalty is calculated based on the amount of tax you owe as shown on the tax return filed. The penalty is 0.5 percent for each month the tax is not paid in full. Unfortunately, there is no cap or maximum limit to this failure to pay penalty, which is calculated from the original filing deadline of April 15 until the full balance due is paid.


Interest is calculated based on the taxes that are due. Interest rates change every three months. Currently, the IRS interest rate for underpayment of tax is now about 4 percent per year.

Filing late

With all of the penalties at the disposal of the IRS, it is better to file on time. However, if the lateness simply cannot be avoided, at least file an extension to potentially avoid or reduce the failure to file penalty. You still may be subject to failure to pay penalty and interest, but it will still be worth it to avoid the potential of up to a 25 percent penalty.

Payment options

To avoid all interest and penalties, it may be more economical to borrow the money to pay from family and friends, draw on a home equity loan or even look to a credit card as an option. While a few of these options may have interest, they are probably far less than 25 percent.

Installment plan

If all else fails and you just cannot come up with the necessary funds to pay the IRS the taxes due, an installment payment plan may be able to be negotiated. First, you must complete Form 9465, which is the Installment Agreement Request. Attach it to the income tax return. You should include the amount you propose to pay each month and the dates of the month the payments will be made.

The IRS will notify you if this Installment Agreement Request has been approved. There is a fee of about $45 for establishing an agreement. Remember, interest may continue to accrue until the balance is paid in full.

No money compromise

If the amount you owe the IRS is so great that you may never be able to pay it, the IRS may accept less than what is owed through the Offer In Compromise Program. You must complete Form 656 – Offer In Compromise and Form 433A – Collection Information Statement. Submit both of these forms to the IRS, along with the $150 application fee. Additionally you must provide a personal financial statement, which includes all of your assets, debts, income and the amount you can pay immediately in an effort to settle this debt.

Before this settlement offer is granted, the IRS will evaluate your current financial picture and future income capacity. If the IRS believes that they will be unable to collect the full amount owed, they may accept the offer. However, the odds are not favorable that your settlement offer will be granted. Remember, this program is for those taxpayers that are in sever financial distress – not those that have the money and are just seeking to pay less than what is owed.

Pay agreements on time or else

If you have successfully obtained an installment plan or an Offer In Compromise Agreement, you must pay all of your federal tax bills on time for the next five years or until the amount agreed upon is paid in full, whichever is longer. If you fail to pay or default on the terms of the Offer in Compromise Agreement, all of your taxes forgiven will be due in full.

Additionally, the IRS may file a lien on any assets that you have in an effort to guarantee payment. So if you remember nothing else, do not just ignore your taxes. File on time and make payment arrangements.

(Contact Carlee McCullough, Esq., at 5308 Cottonwood Road, Suite 1A, Memphis, TN 38118, or email her at This email address is being protected from spambots. You need JavaScript enabled to view it. .)


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