Last Minute Tax Filing and Payment Issues

Individuals who have a balance due on their taxes but who are unable to pay the balance due should file their taxes or file for an extension in order to avoid a "failure to file" penalty.

They have the following options for paying the balance due:

• Pay late. The individual should pay as much as possible with the return or extension. The IRS will subsequently send a "notice of tax due" and the balance should be paid at that time. In addition to the balance due, the individual will be charged interest at the federal rate plus a late payment penalty of 0.5 percent monthly.

• Pay by credit card. The cost for this option is a percentage of tax as a convenience fee plus interest at the credit card rate if the credit card balance cannot be paid on time.

• Installment agreement request. If an individual has no other tax debts, the IRS will generally accept an installment agreement if the unpaid liability is $25,000 or less and the tax due will be paid within five years. An installment agreement request is made by filing Form 9465. An individual who has an installment agreement from a prior year may not file Form 9465.

• Extension of time to pay. An individual can request a six-month extension to pay by filing Form 1127, Application for Extension of Time for Payment of Tax. The individual must show that he or she cannot sell assets or borrow to pay the tax except under terms that would cause severe loss and undue hardship. Form 1127 must be filed by the filing due date. An approved extension eliminates the late payment penalty but has no effect on interest charges.

Penalties for late payment are not imposed if an individual can demonstrate that the failure was due to reasonable cause rather than willful neglect. To request an abatement of penalties, the individual needs to submit a written statement to the director of the IRS Service Center where the tax return is filed. Included with the statement should be all facts showing reasonable cause for the failure and a signed declaration stating the following: "Under penalties of perjury, I declare that I have examined this statement and accompanying information and, the best of my knowledge and belief, they are true, correct and complete."

Reasonable cause for failure to pay any taxes due means that the individual exercised prudence to make payment of tax but was still unable to pay without severe financial loss. The individual needs to provide financial information proving that the individual's expenditures before the payment due date were reasonable in relation to the individual's income. Excessive spending or personal items, speculative investments or investing on illiquid assets demonstrates that the individual did not exercise prudence.

The IRS may extend deadlines for both filing and paying any tax due for up to one year in an area affected by a presidential declared disaster or by a terrorist or military action. Interest is also automatically abated if the IRS extends the due date for filing or paying taxes.