Failure-to-File Penalty Relief Available

By Marcia Richards Suelzer, Toolkit Staff Writer

The IRS has expanded its Fresh Start program, which seeks to provide relief for taxpayers who are struggling to meet their tax obligations. New relief enables certain unemployed or self-employed taxpayers to avoid failure-to-pay penalties if they can't pay their tax liability by the April 17, 2012, deadline.

If you do not pay your taxes by the due date--for most individuals, this is April 17 this year--you will generally have to pay a failure-to-pay penalty. In most cases, the failure to pay penalty is of one-half of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The penalty is capped at 25 percent of your unpaid taxes.

Example. Julie's tax liability for 2011 is $15,000. She had $7,000 withheld from her wages and made $3,000 in estimated tax payments. Thus, her unpaid tax liability is $5,000. She files her return on April 17, but does not make any payment toward the $5,000 owed. On August 23, she pays the $5,000. Her penalty is $125 ($5,000 * 0.005 * 5). This is in addition to interest assessed on the delinquent amount.

You can always avoid this penalty if you make a timely request for a filing extension and you pay at least 90 percent of your actual tax liability by the original due date and you pay the remaining 10 percent by the extended due date. Unfortunately, many individuals are not able to come up with the
90-percent down payment when they file the return. The new Fresh Start penalty relief may be able to help some of those who are in this predicament.

Under the expanded relief provisions, the IRS is providing certain wage-earners and self-employed taxpayers with a six-month grace period before the penalty kicks in, provided that all of the following conditions are met:

1. You are either:
• a wage earner who was unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year, or
• a self-employed individual who experienced a 25-percent or greater reduction in business income in 2011 due to the economy.
2. Your adjusted gross income does not exceed:
• $200,000 if you file as married filing jointly, or
• $100,000 if you file as single, married filing separately, head of household, or qualifying widow(er).
3. Your income tax liability for 2011 (shown on your Form 1040, 1040A, or 1040EZ) is less than $50,000.
4. You file Form 1127A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, on or before April 17, 2012. This form must be filed separately from your return. Form 1127A must be sent to the address shown on the form, which is not the same as the address where you file your Form 1040.
5. You pay your tax, interest and any other penalties in full by October 15, 2012.

If you pay your tax, interest and other penalties in full by October 15, 2012, you will not have to pay the failure-to-file penalty. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Warning. Make sure you file your tax return (or request for an extension) by April 17, 2012--even if you are applying for relief from the failure-to-pay penalty. The failure-to-file penalties remain in effect. The failure-to-file penalty is a steep 5 percent of your tax debt per month, up to 25 percent of your tax liability. (The rate is reduced to 4.5 percent if you are also liable for the failure-to-pay penalty.) If you don't file and don't pay, you can end up owning nearly 50 percent more due to the penalties alone--not to mention interest charged on the unpaid amounts.