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8 Consumer Tips if you owe Uncle Sam on April 15th

Each year, about 20 million taxpayers owe taxes when they file their tax return. On September 30, 2010, the number of taxpayers with serious tax delinquencies grew to over 10 million.

With the economy only marginally better and unemployment still at recession levels, the trend looks to continue.

What can you do if you owe on April 15th? Here are 8 consumer tips that you should follow to save you money and ensure that you do not become a tax debtor again.

#1: Whatever you do, save up to 25% by filing on time. The absolute worse reaction to finding out you owe on your tax return is to not file your return on time. The penalty is 5% per month, up to 25%, for filing late. If you owe $2,000 on your return, that penalty amounts to $500. If you file on time, you will only be charged a small failure to pay penalty and interest on the accrued balances.

#2: Get a payment plan with the IRS- it’s easy to set up. The IRS has basically three payment plans. Most qualify for the two simple payment plans and they are dirt simple to set up. In fact, 94% of all IRS payment plans are these two payment plans. Here they are:

  • Simple payment plan #1: the “guaranteed installment agreement” – the “GIA” is for those taxpayers who owe less than $10,000, can pay in the full balance in three years, and have a clean compliance history (no payment plans and all tax returns filed for the last 5 years). Over 87% of taxpayers who owe have a balance under $10,000- in fact, 3 out of 4 taxpayers owe less than $3,000. For the person who owes $3,000, that is a payment under $100 a month.
  • Simple payment plan #2: the “streamlined installment agreement” – the “SLIA” is for those who owe under $25,000. It allows for the payments to be made over 5 years. The IRS’ minimum monthly payment as the assessed balance divided by 50. This allows for accruals of the failure to pay penalty and interest. For someone who owes $20,000, the payment plan would be a minimum of $400 a month.

The third type of payment plan is a “negotiated payment agreement” based on the amount you owe and your ability to pay. In this case, you would have an amount owed over $25,000 or you would not be able to qualify for a GIA or SLIA. In these rare cases, you will have to provide a financial statement to the IRS and work out payment terms. If you have to go this route, go to a local IRS office and speak with a representative to get your best results. Bring all of your receipts for all of your expenses, bank statements and proof of income for the past three months.

#3: Save money and time and set up a payment plan online. The IRS has made it easy for these taxpayers to get a payment agreement. You can do it by mail via Form 9465 or online using the Online Payment Agreement on the IRS website. Last year, over 61,000 taxpayers set up an online payment arrangement, avoiding the long IRS phone wait times or professional fees in using an accountant if you are tentative about talking to the IRS yourself.

#4: Set up a direct debit payment agreement. It saves $53 and greatly reduces your chances of default. The IRS charges $105 for a payment agreement. However, if you set up a direct debit agreement, the fee drops to $52. Also, because the IRS requires you to pay an amount each month (you cannot prepay next month), you should set up a direct debit agreement to avoid default. Over 40% of all payment agreements are defaulted by the IRS- many due to late arriving payments. Defaults require another IRS contact, intrusive questions, and a $45 reinstatement fee. Avoid all of this mess by setting up a direct debit agreement.

#5: If you cannot pay anything now, ask for 120 days to pay. Sometimes all you need is a few months to pay. The IRS will give you 120 days to pay the amount in full. The cost for a 120 day extension – nothing. If circumstances change within the 120 days, you can always inform the IRS of the change in your finances and set up a GIA or SLIA, with no questions asked. Interest will continue to accrue during this time, but it may give you time to get the funds to pay.

#6: The IRS gives cheap loans- the interest rate is currently 4%. Each quarter the IRS sets the interest rate that they will charge on underpayments. Currently it is 4% and has been that low or lower for over a year. The IRS does charge a failure to pay penalty for all balances due. However, if you get into a payment plan, this penalty is 0.25% per month – or 3% per year. That is an annual interest and penalty rate of 7% – not bad for any consumer loan.

#7: Do not fall for those late night ads for “pennies on the dollar” tax relief. These commercials taught the little-used tax relief program called the “Offer in Compromise” program. To illustrate how little it is used: last year, out of the approximately 20 million taxpayers who filed and had a balance due, only around 14,000 were accepted. Also, the average amount paid in an “Offer” was over $9,000 in 2010. These tax relief firms charge $3,000 or more for what is rarely available. Don’t make matters worse by buying an expensive gamble.

#8: Stop from owing again – change your withholding or start making estimated tax payments. If you owe for the first time or continually find yourself owing each year, change your withholding using a Form W-4 or start making estimated tax payments quarterly to stop the annual cycle of “file and owe.” Next April 15th you will be glad you did.

If you owe Uncle Sam on April 15th, don’t be paralyzed. File on time, pay if you can or make arrangements to pay, and make sure it does not happen next year by changing your withholding. Follow the 8 tips outlined here and save yourself money and time.

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