Why Prompt Tax Filing Pays Off

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With just more than two weeks to the tax filing deadline, financial experts are digging in and urging taxpayers to get a move on. And this year there may be an especially good reason: the average refund is 10% bigger than last year’s.

So far, about half of all taxpayers have filed, and refunds have averaged $3,036, up $266 over last year’s, according to the IRS. Tax cuts in last year’s economic stimulus legislation are the main cause.

Most individuals received a $400 tax credit, couples $800. While many people got this through reduced paycheck withholdings, others will get it in a refund. The American Recovery and Reinvestment Act of 2009 also included a $2,500 credit for college expenses and an $8,000 credit for first-time homebuyers, among other benefits.

Even if you are not expecting a refund, there are good reasons to get your return done on time, according to the tax advice firm CCH.

Most important is avoiding a penalty for failing to file. The penalty is 5% of the tax due for every month, or part of a month, you are late, up to 25%. If you don’t file within 60 days of the due date, the penalty is $135 or 100% of the tax due, whichever is less.
There’s also an interest charge on late tax payments — 0.5% of the unpaid tax every month you are late, up to 25%. “If you file late and owe both failure-to-file and failure-to-pay penalties, the failure-to-file penalty may be reduced by the failure-to-pay penalty,” CCH says.

If that seems confusing, file and pay on time and you won’t have to worry about it. Get a six-month extension to file by submitting Form 4868. Remember that getting an extension to file does not allow you to postpone paying. You’ll still face the late-payment penalty if your tax isn’t paid by the due date (April 15 for most people).

What if money is tight?

You can ask the IRS for a 120-day payment extension or set up an installment payment plan if you owe less than $10,000.

For taxpayers in financial trouble, the IRS has the authority to settle for less than full payment. In prior years, the IRS has used the taxpayer’s past earnings to set a figure, but now it can base the figure on the taxpayer’s current income and future earnings prospects. That can make the IRS more accommodating to people who have lost their jobs or suffered other setbacks. To explore your options, call the IRS at 1-800-829-1040.

Finally, there's the option of putting your tax payment on a credit card. As a practical matter, the interest charge on your card may be higher than the government’s late-payment rate of 0.5% a month. Also, you’ll face a “convenience fee” of 2% to 5% of the amount you pay by card. That’s because the government refuses to pay the fee that’s normally paid by the merchant when you use your card.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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