As tax season draws to a close, millions of Americans scramble to get their documents together and file their taxes. Tax procrastination is a national pastime, so don't feel as though you're the only one going through this rushed, stressful, process. Here are a few last minute tax tips to help late filers get through the process unscathed.
Electronic filing (e-filing) increases every year, primarily because it offers ease of use and quicker returns for tax refunds (tax refunds are typically issued two weeks after a taxpayer files an electronic return). In 2009, an estimated 80 million Americans filed their taxes online, using commercial software or the IRS website's filing page. E-filing reduces the worry of math errors (the software does all the math for you), the cost of paying for return receipts at the post office (not to mention the time spent waiting in line), and the hassle of making photocopies of your return.
For ultra-procrastinators, one of the best tax tips is to file for an automatic six month extension. As long as you submit your request for extension before April 15, you're entitled to a six month reprieve to file a return.
The catch is that while you get an extension to file taxes at the last minute, it's not an extension to pay your taxes. If you owe taxes that money is still due on April 15, and non-payment of taxes subjects you to penalties and interest until you pay.Hence, once of the most important tax tips: if you owe money to the IRS, always pay it on time!
If you're waiting till the last minute because you're afraid you won't be able to afford to pay what you owe, at least submit a partial payment. Paying at least a portion of the taxes you owe does two things. First, it reduces the amount of penalties you will be assessed for late payment of taxes. Second it is a good-faith showing to the IRS that you are serious about paying your taxes and reduces the chances that the IRS will decide to audit you.
Making a credit card payment may be tempting, but with the recent increase in credit card interest rates, it's probably not a fiscally smart move. For those with interest rates under 10% (which is a tiny portion of the U.S. these days), it may make sense, but for everyone else, you'll likely be paying more in interest over the long term with credit cards than with the IRS. On the other hand, if you just need to use the credit for a few months and can pay off your credit card in full before too long, credit cards can make sense.
For a point of reference, the IRS failure to pay penalty is 0.5% for each month the tax is not paid and the interest is 4% per year. The failure to file penalty is 5% each month your taxes are filed late, up to a maximum of 25%.
As you can see, the penalties for not filing your taxes can be crushing in addition to the taxes you already cannot afford. So be sure to at least file your taxes (or file for an extension) and make a partial payment by April 15. If you need a long period within which to pay the total amount, you can arrange a payment schedule with the IRS, though interest will continue to accrue until the tax is paid in full.