The Internal Revenue Service (IRS) issued news release IR 2012-40, on April 3, 2012, with its annual reminders about options to extend individual income tax returns. This year’s release has some useful information for taxpayers who need an extension to pay their taxes.
In the release, the IRS highlights two new or expanded options under its Fresh Start initiative for taxpayers who need to defer payment of their federal tax liabilities. First, taxpayers who owe up to $50,000 in back taxes may set up an installment payment plan that allows them to make monthly payments on the balance due for up to six years. Taxpayers or someone with power of attorney can sign up for this plan online. Taxpayers do not have to receive a notice of tax due from the IRS to enter into an installment agreement.
Second, taxpayers unemployed for at least 30 consecutive days in 2011 (or through April 17 of 2012) or self-employed individuals with a 25 percent or greater reduction in business income in 2011 may file Form 1127A, “Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship,” to request a six-month grace period to pay their tax liability and avoid failure-to-pay penalties. In order to qualify for the relief, a taxpayer’s income must not exceed $100,000 ($200,000 for married filing joint taxpayers).
The IRS also emphasizes that taxpayers may file for an offer-in-compromise if they believe an economic hardship will prevent them from being able to pay their entire tax bill. The offer-in-compromise process can be time consuming and complex. The IRS recently attempted to streamline the offer-in-compromise process (see SBSE memorandum) for taxpayers with liabilities less than $50,000 and gross income of $100,000 or less.