For the last several years, the Internal Revenue Service has offered some relief for people having problems paying their taxes.
This tax season, the IRS has specifically targeted the unemployed and small-business owners for help through its "Fresh Start" initiative. The agency is also making a change to its installment agreement program, doubling the dollar amount it takes to be eligible for quick and streamlined installment payments.
"We have an obligation to work with taxpayers who are struggling to make ends meet," said IRS Commissioner Doug Shulman.
Taxpayers need to keep in mind that there are two distinct penalties when they don't file or don't pay their taxes on time.
A failure-to-file penalty is levied at 5 percent of your unpaid taxes each month or part of a month that your return is late. It caps out at 25 percent of your unpaid taxes.
A failure-to-pay penalty is assessed at one-half of 1 percent per month with an upper limit of 25 percent.
The IRS is giving eligible unemployed and certain self-employed individuals a six-month grace period from the failure-to-pay penalty. The reprieve applies for taxes owed for 2011 and only if people have requested an extension to pay their taxes. If you need more time to prepare and file your tax return, you still need to submit IRS Form 4868 to get an extension.
Even though Form 4868 tells the IRS you need more time to file, it does not excuse you from any taxes that are due.
Under Fresh Start, eligible individuals will now have until Oct. 15 to pay their taxes and avoid the failure-to-pay penalty. To qualify, you have to have been unemployed at least 30 consecutive days either in 2011 or this year up to the April 17 tax filing deadline. You get the same reprieve if you are self-employed and have experienced a 25 percent or greater reduction in your business income in 2011 because of the bad economy.
It's easy enough to apply for the program. Just complete IRS Form 1127-A "Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship." The form is available on IRS.gov and is also due by April 17.
Now, a few caveats. First, the penalty is subject to income limits, which can't exceed $200,000 if you file married filing jointly or $100,000 if you file as single or head of household. The failure-to-pay penalty relief is also limited to people whose calendar year 2011 tax balance owed does not exceed $50,000.
Additionally, the IRS says it is still required by law to charge interest on unpaid back taxes. The agency does not have the authority to waive the interest charge, which is currently 3 percent on an annual basis. Interest is compounded daily.
The IRS is also increasing the threshold for using an installment agreement without having to file a financial statement. With an installment agreement, you are allowed to pay your full tax obligation in monthly payments. You should know, however, that although penalties are reduced, interest continues to accrue on the outstanding balance.
The threshold for an installment agreement has been raised from $25,000 owed to $50,000. So if you owe up to $50,000, you can now get a streamlined payment plan with the IRS that increases the time you have to pay. The maximum term for streamlined installment agreements has been increased to 72 months from the current 60-month maximum. In order to qualify for the new expanded streamlined installment plan, you have to agree to monthly direct-debit payments.
You can set up an installment agreement by going to the IRS website and searching for "Online Payment Agreement." To qualify, you have to have filed all your tax returns and provide some personal information such as your Social Security number. But you get immediate notification of approval.
Here's the bottom line. If you know you are going to have trouble paying your taxes, file your return anyway. Don't panic and shell out thousands of dollars to a company that claims it can significantly reduce your tax liability. Generally these claims are grossly overstated. Call the IRS or visit its website and see if you qualify for any of its Fresh Start initiatives.