By Eva Rosenberg, MarketWatch
LOS ANGELES (MarketWatch) — For the past several years, as we have struggled with this depressed economy, the kinder, gentler IRS has released announcement after announcement about ways they are trying to help taxpayers.
The latest announcement came last week, all about IRS’s latest installment in their so-called Fresh Start initiative. There’s lots of good news for taxpayers who don’t have enough money to pay their tax balance on April 17.
What the announcement doesn’t make clear is that to get these benefits, you must a file a new form on or before April 17. The new form is Form 1127A.
What does this form get you?
An extension of time pay taxes for 2011. You get until Oct. 15, 2012. That’s a unique benefit. For years, it’s been hammered into our minds that the normal extension, Form 4868, is only an extension of time to file your tax return — not to pay your taxes. Note: If you do not pay your 2011 taxes in full by Oct. 15, 2012, all your penalties on the unpaid balance will be reinstated from April 17, as if you had never filed this form.
A 6-month waiver of the IRS failure to pay penalty, from April 17 to Oct. 15, 2012. Normally, that penalty is ½ of 1% (.005) per month until it reaches 25%. That means, if you pay your 2011 taxes on Oct. 15, 2012, you will save 3% in penalties. If you owe $5,000, 3% savings is worth $150.
What does this form not get you?
It does not get you an extension of time to file your tax return. You still need to file Form 4868. If you don’t remember to file for your extension, you will be subject to the late filing penalty of 5% per month, until it reaches 25%.
It does not give you a waiver of the interest on your unpaid balance. The current interest rate is 3% per year. Much cheaper than credit cards.
Who is entitled to this Fresh Start protection?
Not everyone. The penalty relief will be available to two categories of taxpayers:
Wage earners who have been 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.
Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
And there are limitations on income and balance due. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
What if you know that you absolutely will not be able to pay the balance due by the October deadline? Is there any hope? Yes.
You can get an installment agreement more easily than before. The IRS has raised the threshold for automatic approval on installment agreements to $50,000 (from $25,000). You now have 72 months to pay your balance in full, including interest and penalties (instead of 60 months). Though you will have to submit a financial statement on Form 433-A or 433-F (the shorter version), to qualify.
You can use the online payment agreement application and get instant confirmation. Or you can mail Form 9465 to the appropriate IRS office. Note: There are fees for these installment agreements. $105 is the base fee for folks paying by cash, check or payroll withdrawal. The fee is reduced to $52 if you agree to have the funds withdrawn automatically from your bank account. If you qualify as a low-income taxpayer based on the data on Form 13844, you can get a reduced fee of $43.
But this will ruin your credit?
Yes, having an IRS debt generally means there will be an IRS lien placed on your credit. That’s why your best bet is always to avoid tax debt altogether. If you can find a way to borrow the money, do so. If you cannot, there is another way to protect your credit.
At the urging of Nina Olson, the National Taxpayers Advocate, the IRS has agreed to do two things to help protect your credit. It all revolves around withdrawing liens.
First, liens will not be filed if your tax debt is under $10,000.
Second, for your 2011 debt, if you agree to a direct debit payment of your installment agreement, IRS will not file the lien.
If a lien has already been filed and you enter into a direct debit installment agreement, IRS will withdraw the tax lien, if you ask nicely.
If you are paying a tax debt now, and you pay it off, the IRS will withdraw the lien, if you request it.
Finally, the IRS has put systems in place to speed up the withdrawal of liens.
Note the word “withdrawal.” That is very different from removing a lien. When someone removes a lien, it remains on your credit for at least seven years. Withdrawing a lien means it’s as if the lien were never there. Withdrawals are designed for the lien to be removed from your credit right away.
Other little benefits
The IRS knows that even with all this help, not everyone will be able to pay their taxes in full, regardless of how much time is provided. There are simply too many people out of work, or under-employed.
So, the IRS has also streamlined their offer-in-compromise (OIC) process for folks with income levels up to $100,000. If your tax debt is up to $50,000, IRS will make it easier for you to pay pennies on the dollar. You will have to file your financial information with IRS on 433-A or 433-F. And if IRS sees that you have enough assets to pay your tax debt, you will not get your OIC. But if it’s clear that you’re insolvent, the IRS will work your case.
None of this is easy. Not all of these benefits will take effect overnight. But, you didn’t get into tax debt overnight, either.
These benefits are predicated on your being in compliance right now. So, if you’re working, be sure to have enough withholding taken from your paycheck to cover your 2012 taxes. And if you’re self-employed, your first priority is to pay your 1st estimated tax installment for 2012 by April 17.
Of course, with an extension and the penalty waiver until Oct. 15, you do have time to run a tax sale or garage sale to generate enough money to cover last year’s taxes. Maybe you won’t need an installment agreement, after all.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered for free. Rosenberg is the author of several books and ebooks, including “Small Business Taxes Made Easy,” and teaches tax courses at IRSExams.com and CPELINK.