For the estimated 35 million folks who will file their taxes during the final days leading up to this year's deadline of April 17, time is now certainly of the essence. So, The Early Show money maven Ray Martin dispenses some suggestions to help smooth their 11th-hour way.
Six critical items to check before you file your return
April 17 is "Pay Day"
For many last-minute filers, April 17 is also "Pay Day," as they will need to pay the taxes they owe, along with filing their returns. Many people still pay their taxes by mailing a check. The problem is that paper checks can be the target of fraudulent alterations. For this reason, the IRS suggests making the check payable to the "United States Treasury," not the "IRS." I also suggest using a pen with pigmented ink that cannot be washed or bleached, which would make it impossible to alter the check.
If you would like a more secure way to pay your taxes, then consider electronic debit from your bank account, which can be elected when you file your return or an extension using your personal computer and tax preparation software. An electronic return originator fee charged by the various software providers would apply; it typically ranges from free to $25. When paying your taxes by direct account debit, you can specify an account and a payment date up to the April 17 deadline. All you need is the name of your bank, the account number, and the routing number, all of which should be on your checks.
But first, check with your financial institution to be sure it allows Electronic Funds Transfer (EFT) and to ensure you are using the correct routing number, to avoid any payment delays.
If for some (paranoid) reason you think electronic bank account debit could make it easier for the IRS to spy on you, get a grip: The same information you would provide electronically is already available to the IRS from the information you file with your tax return.
What if you owe taxes but cannot pay in full?
You should always file your return on time (by the due date, plus extensions), even if you don't have enough money to pay your taxes in full. The penalty for filing late is stiff: Five percent per month up to a maximum of 25 percent of the amount of tax due on the late-filed return. The penalty for paying late is also onerous: one-half of 1 percent per month, up to a maximum of 25 percent of the amount due on the return. Suffice to say, filing and paying late can get expensive.
So what do you do if you can't pay the full amount of taxes due? One alternative is to seek a personal loan from a bank or a credit union, but chances are that if you cannot pay the taxes you owe, you also may not be eligible for a loan.
If you owe $25,000 or less, another option is to pay what you can and attach a Form 9465 Installment Agreement Request with your tax return. The IRS charges a user fee for setting up an installment agreement. The fee can range as high as $105 ($52 if payments are set up to be automatically deducted from your bank account, and even less for folks with incomes below certain levels). You have up to five years to pay, and you'll have to pay all future taxes in full and on-time.
To make this request, attach the Form 9465 to the front of your tax return and include a statement explaining why you cannot pay the full amount of taxes owed. The IRS will contact you with the terms of the installment payment plan.
You'll also pay penalties and interest on the taxes you owe until the agreement is paid off. However, the IRS could work out a payment plan at a reduced interest rate. Also, as a condition of the installment agreement, any future tax refunds will be automatically applied against the amount you owe until the balance is paid off.
You can also pay your taxes using the Credit Card Payment Option, which is available through the Official Payments Corporation. You can charge your taxes on your VISA, MasterCard, Discover or AmericanExpress card, earning the rewards offered by your card for things such as airline travel or cash back.
But using this option is no free lunch: The costs include hefty convenience fees and interest charges. Since the IRS does not pay the credit card company a merchant fee, the credit card company has to get its piece of the action by charging you a convenience fee. If the amount of taxes you owe is $2,500 and you pay by credit card, the convenience fee for charging your federal taxes is $62.25. Charge $8,000, and the fee is $199.20. Charge $40,000 (the amount to qualify for a free airline ticket on some airlines), and the fee is $996. Also, if you don't pay your credit card balance in full, you could end up paying hundreds of dollars of interest at a rate higher than the IRS interest rate for installment payments.
The bottom line is that making a partial payment of what you owe and filing an Installment Agreement Request is better than not filing and subsequently incurring IRS penalties for late filing and late payments. And if you don't pay, the IRS will not go lightly on you: It typically will commence a collection action to levy your future wages for unpaid taxes, penalties and interest.
Automatic six-month extension
If you'd rather deal with your taxes later, then you can file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns. To avoid a failure to file penalty and interest, you must file Application for Automatic Extension by April 17. While this gives you an automatic six-month extension, until Oct. 15, 2007, to file your final tax return, it does not give you an extension on paying the taxes you owe.
If you file an extension, you need to also calculate a reasonable estimate of taxes owed and submit a payment with the Form 4868. You will need to pay at least 90 percent of what you think you owe to avoid any late payment penalty, and you will need to pay the full amount of the taxes you owe to avoid paying additional interest.
It's a good idea to file an extension, especially if you need more time to do a through job preparing a return for a rather involved year with lots of new issues. And, if your tax preparer is really bogged down, ask him or her to file an extension and he or she would get to your return later, when he or she can give it his or her full attention and do a more through job. Also, many financial institutions are still sending corrected 1099 forms with revised amounts for qualified dividends and foreign taxes. Taxpayers with investment income may want to file an extension and request a corrected copy of the form 1099. You can file your return later with the correct information.
Contrary to popular belief, filing for an extension does not make your return a bigger target for the IRS to select for an audit.