Delinquent Taxpayers Should Respond to IRS Now

Late payments can cost thousands and lead to serious financial hardship

SAN MATEO, Calif., April 16, 2008 — With most federal and state income tax returns due this month, the clock is ticking for those who have not yet filed returns, and procrastinating racks up penalties, interest charges and the danger of punitive action by the IRS, warns Brad Stroh, co-founder and co-CEO of free online consumer finance portal Bills.com.

Bills.com is the online portal for Freedom Financial Network, LLC. The company’s Freedom Tax Relief division provides tax-specific debt resolution services.

Stroh offers nine things Americans must know about handling their taxes NOW:

  1. Penalties, penalties: Filing late racks up penalties and interest for those who owe money to the Internal Revenue Service (IRS). The penalty for filing late is 5 percent of the amount of tax due shown on a return — each month. Penalties max out at 25 percent for returns that are one year late. In addition, a taxpayer paying late will pay monthly interest at half of 1 percent of the unpaid amount each month. On top of these penalties is regular interest. The bottom line: Filing a return one year late can result in penalties and interest that add as much as 38 percent to the tax owed on a tax return.
  2. Get an extension: If for some reason you cannot complete out your return, you can file for an extension (IRS Form 4868). You might still have penalties, but they will be less than if you simply do not file.
  3. Interest is a one-way street: Taxpayers who file late and expect a refund will not receive any interest on the refund amount. If a return is filed more than three years late, there will be no refund - the IRS keeps the funds.
  4. The IRS has a heart: Well, a bit of a heart, anyway. Taxpayers who absolutely cannot pay taxes should contact the IRS. The agency has policies that cut some slack for taxpayers who contact the IRS or pay a late bill before the IRS finds them (for serious scofflaws, IRS policies offer reduced or no jail time if the taxpayer comes to them first). For those who cannot pay because of a death in the family, serious illness, financial records lost in a natural disaster, or reason the IRS deems "reasonable cause," the IRS might waive penalties after being contacted by the taxpayer.
  5. Pay what you can: The penalties for not paying tax owed with a filed return are much less than the penalties for not filing a return with an unpaid balance. If you are considering not filing a return because you cannot pay the bill, you are probably better off filing and avoiding the substantial late-filing penalties.
  6. Pay how you can: If it is at all possible for you to pay your tax bill, the IRS Web site suggests taxpayers consider bank loans, cash advances on credit cards, raiding savings accounts, borrowing against retirement or life insurance, or using equity in assets (such as a home) to pay. However, if you are in dire financial circumstances, exchanging one debt for another will not make things easier, and putting a home at risk is almost never a smart move. Consult a tax and/or financial adviser before making a decision.
  7. Know your options: The IRS sets up various methods for taxpayers to pay taxes owed. These include: an installment agreement (a payment plan); "currently not collectable status," a temporary delay in which the IRS waits to collect (but still charges penalties and interest, and may put a lien on assets); or an offer in compromise, where a taxpayer who is out of financial options makes a one-time settlement agreement with the IRS to pay a lesser amount. Taxpayers with tax debts under $10,000 usually can manage the payment on their own or via an installment plan arranged with the IRS.
  8. Do not count on bankruptcy protection: Historically, consumers in severe IRS debt might file for Chapter 7 bankruptcy protection. Now, with the bankruptcy "means test," many consumers must file Chapter 13 bankruptcy, which establishes a repayment plan, rather than wiping out all debt.
  9. Get help: Specialists can negotiate directly with the IRS on behalf of consumers who owe $10,000 or more. Tax relief specialists usually are attorneys, enrolled agents or certified public accountants with special training and experience. They can navigate the intricacies of IRS forms and calculations, help consumers understand the criteria the IRS imposes, and then help them get back into good standing with the IRS.

"Whether tax day is on its way or has come and gone, the sooner you file and pay, the better," Stroh urges. "If you’re facing a bill that you know you can’t handle, seek out help from a tax relief specialist. When it comes to taxes, remember, the operative word is NOW."

About Bills.com

Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans.

Since 2002, Bills.com has served more than 40,000 customers nationwide while managing more than $1 billion in consumer debt. Bills.com is the online portal to Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young’s Entrepreneur of the Year Awards.