The Oct. 15 tax extension gives a taxpayer more time to file their return however, not more time to pay.
It is important to file your 2019 tax return on or before Oct. 15, 2020, or you may incur a late-filing penalty.
- The IRS late-filing penalty is 5% of the amount due for every month or partial month your tax return is late.
- The maximum penalty is 25% of the amount due
Even if you cannot pay your tax liability, please file by Oct. 15!
If a taxpayer has a tax liability, failure-to-pay penalty is charged for failing to pay your tax by the due date. The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.
The IRS offers several payment options:
The IRS has an official 120-day payment agreement. As long as you owe less than $100k in combined tax, interest, and penalties, you can apply for this online.
- Use the Online Payment Agreement application—it’s the same application you use to apply for an installment plan.
- There is no fee for setting up a 120-day IRS payment extension.
- However, your unpaid taxes will continue to accrue interest during this time. In most cases, you pay less penalties and interest with this plan than someone who chooses an installment agreement.
The IRS offers an Installment Agreement (Form 9465), which is used to request a monthly installment plan if you cannot pay the full amount you owe shown on your federal tax return. It is highly recommended that you pay a portion of the amount you owe and request an installment for the remaining balance.
- The IRS charges a user fee when you enter into a payment plan; however, if you are a low-income taxpayer, this user fee is reduced and possibly waived or reimbursed when certain conditions apply.
- In rare cases, you can also qualify for a six-month hardship extension to pay the taxes owed. To qualify, you need to show that paying your taxes when due would result in a severe hardship. The IRS stresses that this cannot be a mere inconvenience. Rather, paying on time must cause a true financial loss. To apply, use Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship.
- If Form 1127 is approved, you will have the ability to make a payment at a later date without any failure to pay penalty tacked on to your balance. Again, only interest charges that accrued from the original due date would be applied to the balance.
Lastly, you may want to submit an offer in compromise (OIC) to the IRS. An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or if doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:
- Ability to pay
- Asset equity
An everyday taxpayer cannot request an offer in compromise, only tax professionals can present the submission before the IRS. If you need more information and training about this topic, NATP has two on-demand webinars to get you started: What is IRS Representation? and IRS Representation 101. Premium members can attend these for free.