Good news if you can’t pay all or part of your 2011 taxes on time because you’ve had a poor year: The Internal Revenue Service has announced a major expansion of its "Fresh Start" initiative, which is designed to give relief to taxpayers who can’t pay their taxes due to the bad economy.
The IRS says that qualifying taxpayers can now file an extension of time to pay their 2011 taxes and wait until Oct. 15, 2012, to file their returns and pay the balance due, without having to pay any penalties.
Until now, taxpayers who opted for an automatic extension to file their tax returns until Oct. 15 had to pay all their taxes due by April 15 (this year it’s April 17) or be subject to penalties on the unpaid balance. Now, you can get an extra six months to pay without having any penalties imposed.
The savings can be substantial because the failure-to-pay penalty is generally half of 1 percent per month on the balance due, with an upper limit of 25 percent. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
The penalty relief is available to two categories of taxpayers:
1. Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012, up to the April 17 deadline for filing a federal tax return this year.
2. Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
This penalty relief is also subject to income limits. A taxpayer’s income must not exceed $200,000 if married filing jointly or $100,000 if single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
If you qualify and want the extension to pay, you must complete and file new IRS Form 1127A.
The IRS has also made it easier for many taxpayers to enter into installment agreements with the IRS. An installment agreement allows you to pay your taxes due over several months or years, instead of all at once. Penalties are reduced, although interest continues to accrue on the outstanding balance.
Until now, taxpayers who owed more than $25,000 and wanted to enter into an installment agreement with the IRS had to supply detailed financial information. However, effective immediately, the threshold for using an installment agreement without having to supply a financial statement has been raised from $25,000 to $50,000. This is a significant reduction in taxpayer burden. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.
Taxpayers seeking installment agreements exceeding $50,000 will still need to supply the IRS with detailed financial information by filing a Collection Information Statement (Form 433-A or Form 433-F). However, such taxpayers may pay down their balance due to $50,000 or less to take advantage of the streamlined payment option.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.