The tax season is over. If you've procrastinated like many North Americans, you may be very worried (and yet somehow STILL unable to get started). Although you have missed the deadline, there are steps you can take to avoid or reduce penalties and interest costs. Majority of taxpayers do not owe taxes and are often entitled to a refund. If you are a procrastinator the following tips will come in handy.
photo credit: mondays child
So, take a deep breath and let's get started:
5 Tips to Ease Your Pain and Stress
If you've waited to pay until the last minute, you're in good company. According to a recent survey, 40 percent of all tax returns in 2009 were filed late. Here are a few things you should know that can help calm your nerves:
- Refund = no penalty – Since penalties are calculated on the amount due, if you don't owe any money, you won't be charged a penalty.
- Payment plans – Depending on your individual circumstances, you may be eligible for a payment plan to help alleviate the stress of paying all at once. In Canada tax relieve provision can help.
- Tax professionals can help – If you're in a bind and are past the deadline, contact a tax professional. Not only can they help you file your taxes, but they're also well aware of any penalties you may be charged, as well as your payment options. They can also help guide you, should you get audited.
- Organization helps – Even if you're dreading the payment of taxes, it helps to get organized sooner rather than later. Work with tax software or a professional to get your return ready ahead of time – then, you can wait to send in your payment. Just make sure it's postmarked by April 15.
- It's easy to file an extension – If you really don't think you'll make it by the deadline, submit Form 4868 to the IRS. This will move your tax deadline to October 15. Canada: Extension is not available.
7 Essential Things to Know About Penalties
Many taxpayers assume the worst- hefty penalties or even jail time. But the reality is, there are actually many options available to you. Here's what you should know when it comes to penalties:
- There are five primary types of penalties:
- Failure-to-file penalty – This penalty is calculated based on the time between when you actually filed your tax returns and when it was due (this includes extensions). The penalty is 5% per month for each month it's late, up to a maximum of 25%. In Canada the penalty is 5% on your 2010 balance owing plus 1% of your balance owing for each full month, to a maximum of 20 months.
- Failure-to-pay penalty – This is based on the amount of tax you owe, at a rate of 0.5% for each month the tax isn't paid in full. This type of penalty doesn't have a maximum limit, and is calculated from the April 15 to the day the balance is paid.
- Late payment penalty – This is a penalty of 0.5% for each month your tax isn't paid if both of these apply:
- Your return was filed on time
- You're paying according to an installment agreement
- The maximum penalty is up to 25% of the tax that's due. However, the 0.5% rate will increase to 1% if the tax remains unpaid 10 days after intent to levy is issued.
Canada: You will be charged interest on any unpaid amount and this is compounded daily. Interest will also be charged on penalties. The rate changes every three months.
- Late filing penalty – If you didn't file on time and you owe tax, this penalty applies to you. The penalty adds up to 5% – a 4.5% late filing fee, plus a 0.5% late payment fee for each month the payment is late. This is imposed for a maximum of five months. Afterward, the penalty will keep increasing up to 25%.
Canada: The penalties are as outlined above and interest will accrue on the balance owing.
- Non-payment (or effort) – If it's evident your taxes haven't been paid and you're not making an effort to pay them, the IRS can sell or mortgage your assets. If there's still no effort, the IRS may levy your bank account, wages, or other income. This can also have an effect on your taxpayer credit standing.
Canada: Not paying taxes constitutes tax evasion and will have criminal consequences. Taxpayer will face criminal prosecution.
- Waivers are available – You can request a waiver of the above penalties for certain things, including a disaster, casualty, or other unusual circumstance.
- Need more time? Request an installment agreement. If you can't pay all of the money you owe in one lump sum, visit Irs.gov to set up a payment plan. The setup fee is regularly $105, but decreases to $52 if you make payments by automatic debit. Some low-income applicants may also qualify for a fee of $43. You'll also be charged the late-payment penalty charge of 0.25% per month it remains unpaid.
Canada: If you have made reasonable efforts to obtain the funds through borrowing or re-arranging your finances, CRA may accept payment arrangements. You can set up preauthorized debit payment through My account, arrangements can also be made through TeleArrangement 1866-256-1147 or call 1888-863-865 to speak to an agent. There are no fees for payment arrangement, however you will be charged interest on balance owing.
9 Tips for Paying the IRS/CRA
Whether or not you filed your taxes on time or well in advance, there are several things you should keep in mind about getting a payment to the IRS/CRA – that is, if you owe them money this year.
- Payment via check – All checks should be made payable to the United States Treasury (USA) or Receiver General (Canada).
- Include your social security/insurance number, employer identification number, related tax form number, and tax period.
- Cash payments – These should never be sent through the mail. Instead, make them in person at your local IRS office. For a list of which offices accept cash payments, visit Contact My Local Office. In Canada you can make cash payment at your Financial Institution, free of charge.
- Hand deliver – If you're cutting it really close to the deadline, consider hand delivering your tax return to the local office. Before doing so, make a photocopy of the front page of each and ask the representative to stamp the copy. This will prove where and when you filed your taxes, as well as what you filed.
- Electronic Federal Tax Payment System – This program allows you to pay your federal taxes with your bank account, debit card, and more. Canada: You can make your payment through My Account.
- Credit card – Some taxpayers prefer to pay with their credit card, but this many times results in large interest rates plus the IRS service providers' processing fees that range from 1.95% to 2.35%.
- Borrow from your 401(k) – Although this isn't the most ideal option, borrowing money from your 401(k) is a possibility if you don't have the funds to pay in full. When using it for your taxes, you won't incur an early distribution penalty.
- OIC (Offer in Compromise) – A final option is to apply for an OIC (Offer in Compromise), in which the IRS will settle for less than what's owed. However, this may be a long shot – the process can take up two years – and only 24% of OICs were accepted in 2008.
- Late returns – These must be filed on paper and mailed into the IRS. Although you can still use tax software to prepare your returns, they can't be filed electronically. Canada: You can continue to use Netfile.
- Mail returns – Be sure to mail your returns in separate envelopes (if completing them for multiple years). Send them by Certified Mail so you'll get notification when each was received.
I hope this article has helped ease your mind about paying taxes after the filing deadline… The steps above can help ease the pain and stress – now stop reading and go file your taxes 
About the Author:
Pamela King promotes basic tax literacy and believes in tax payer empowerment through research and education. She encourages e-filers to save money on their taxes – even if filing late – by seeking free tax preparation resources.
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