You have three weeks to complete your 2021 tax return.
If you need time beyond the April 18 deadline, you can request an extension. That would give you another six months, or until October 17, to file your case.
But a file extension is not an extension to pay if you owe on your return.
If you owe and don’t pay by April 18, you could be hit with penalties and interest.
How much? Many.
The IRS said interest generally accrues on any unpaid taxes from the filing due date – for this year, April 18 – until you make full payment.
“The interest rate is determined quarterly and is the short-term federal rate plus 3%,” the IRS said. For the second quarter of 2022, the the federal short-term rate is 1%.
And, he says, interest accrues daily.
This means that you will pay interest on your interest every day.
But that’s not all.
You may also be subject to what the IRS calls a “default” penalty. It’s expensive.
To have a valid extension, a taxpayer must have paid 90% of the tax by the original due date, said Neil Becourtney, chartered accountant and tax partner at CohnReznick in Holmdel.
“So owing $1,000 when your tax is $2,000 means you only paid 50% of the tax,” he said. “If you owe $1,000 when your tax is $100,000, that means you’ve paid 99% and you’re avoiding the late filing and late payment penalties.
He said that if a taxpayer did not meet the 90% threshold, they would be hit with the “default” penalty of 5% per month for up to five months, a total of 25%, plus a late payment penalty payment penalty of half a percent per month, or 3% over six months.
That’s a total of 28% – plus interest.
Although you can request a short-term payment plan of up to 180 days, that won’t help you with the interest and penalties that keep accumulating. You can set up a payment plan using the IRS Online payment agreement request or by calling us at (800) 829-1040.
If you need more than 180 days, you can request a longer period monthly payment plan. Complete the online payment agreement and also complete Form 9465, Request for Installment Agreementand mail it to the IRS.
“The IRS charges a user fee when you enter a payment plan; however, if you are a low-income taxpayer, these user fees are reduced and possibly waived or refunded when certain conditions apply,” he said.
If that’s not enough, you can try what’s called a Offer in Compromise (OCI)in which the agency would accept a reduced amount.
“Before the IRS will consider an ICO, you must have filed all required tax returns, made all required estimated tax payments for the current year, and made all required federal tax filings for the quarter ongoing if you’re a business owner with employees,” he mentioned. “If you are in open bankruptcy proceedings, you are not eligible to enter into an ICO.”
To see if you might be eligible, use the IRS Compromise pre-qualification offer tool.
Also note that if you can show “reasonable cause and the default (of payment) was not due to willful negligence,” the IRS can mitigate your penalties. You will still owe the interest.
“Making a payment in good faith as soon as possible can help establish that your original failure to make timely payments was due to reasonable cause and not willful negligence,” he said.
Please sign up now and support the local journalism YOU rely on and trust.