Advice | Why should you pay the IRS on time? The underpayment penalty is 8%.

[ad_1]

With tax season in full swing, there’s one thing to remember: If you owe the IRS, the interest is hefty.

Under the tax code, the interest rate for overpayments and underpayments is set quarterly. On April 1, it will remain 8 percent for individuals — nearly triple the 3 percent levied during the same quarter of 2021.

It’s important to pay what you owe on time — or as much as you can — because interest is compounded daily. This means the interest is assessed on both the previous day’s balance and additional interest charged.

Generally, interest accrues on your unpaid tax from the return’s due date until the debt is paid. By the way, filing an extension won’t stop the clock.

If you owe the IRS, do something that may seem scary: Call the agency.

What you should avoid is responding to ads touting tax debt settlement.

It’s not a good option: At worse, you may fall for a scam and be out thousands of dollars — money that could have been used to pay your tax debt. Even if the company is legitimate, it’s very likely you could have gotten the same assistance by calling the IRS or going to irs.gov, and searching for “What if I can’t pay my taxes?”

On the IRS homepage, click on the “Make a Payment” link and you’ll find additional information about your options if you can’t pay your tax bill, including “Apply for a Payment Plan.”

The IRS’s new free tax filing website is ready to use

You may qualify for an installment agreement to pay off your balance over time, including any penalty and interest, of course.

You can also apply for an “Offer in Compromise” (OIC), a program in which the IRS will settle a tax debt for less than the amount owed. It’s not easy to qualify for an OIC, but it’s still worth the effort if you are struggling and don’t think you can reasonably pay the debt. Again, go to irs.gov and search for “OIC,” and then use the pre-qualifier tool to check your eligibility.

I’ve persuaded numerous people to overcome their apprehension of dealing directly with the IRS. They called and were easily put on a payment plan. In one case, it kept a young business owner from paying $8,000 to a tax debt settlement company. He was able to set up a plan on his own and save the 20.99 percent interest the firm was going to charge him.

“By setting up a formal payment agreement, you’ve taken the first critical step in lessening future charges,” said IRS spokesman Eric Smith. “Any partial payment will help, even if you need a payment agreement for the rest.”

IRS is waiving $1 billion in penalties. Beware of tax debt relief companies.

While a payment agreement is in effect, the late-payment penalty (i.e. failure-to-pay penalty) accrues at half the normal rate. Instead of the usual one-half of 1 percent (0.5 percent) per month rate, accruals are just one-quarter of 1 percent (0.25 percent) per month, Smith pointed out.

“Like paying a mortgage off early, a taxpayer will always benefit by paying off a tax debt early,” he said. “That’s because the base on which future penalty and interest is figured is less.”

When you make a payment on past-due tax, the money is first applied to tax, then penalty and then interest, Smith said.

If you absolutely feel you can’t handle a collection issue on your own and need the services of a tax professional, do some research. Don’t default to contacting a company you heard about on the radio or a television commercial.

If your income is low enough, you could get free help from Low Income Taxpayer Clinics, which can represent you before the IRS in tax collection matters and other disputes. To find a clinic, use the Low Income Taxpayer Clinics finder at taxpayeradvocate.irs.gov.

Here’s another thing. If you owe the IRS, but can’t pay, still file on time.

Have you tested the new IRS Direct File site? The Post wants to hear from you.

There’s a penalty for filing late and one for paying late. And interest accrues on top of penalties. Even if you don’t have the money, at least file on time. The failure-to-file penalty is 5 percent of the unpaid taxes for each month or part of a month that your tax return is late. Ordinarily, the penalty won’t exceed 25 percent of your unpaid taxes.

“Unlike wine, neither tax returns or payments get better with age, so even though there are penalties and interest for paying late, they pale in comparison to the penalty for filing late with a balance due,” Smith said.

And if you file on time and are able to partially pay, the smaller balance will reduce your penalty and interest outlays, he said.

I know you might fear the wrath of the IRS if you have a tax bill you can’t pay. You might want to do anything but contact the agency. Please, fight that instinct.

[ad_2]

Source link

Leave a Comment