Dear Bonnie: Late last year I started a new job after being unemployed for almost the entire year. I collected unemployment, which I now have to pay tax on. I just did my taxes and I cannot pay the amount due. I know that they really sock it to you with penalties and interest so I fear I will never be able to catch up. Is there any way out of these penalties? I was out of work for a long time so I don’t feel like this is entirely my fault. – Rob, Sonoma
Dear Rob: You’re in luck. The IRS has a Fresh Start program that they started in 2008. It is designed for people who have been out of work for 30 days or longer. In this program, the failure-to-pay penalties are abated while doubling the dollar threshold for installment agreements.
You can request a six-month reprieve for the failure to pay penalty. As long as you pay the entire liability by October 15, 2012 you won’t have to pay the penalties. Unfortunately, you can’t avoid the interest. The IRS always wants the interest and will only abate interest if they made an error. The current interest rate is 3 percent per year.
The Fresh Start program also works for self-employed individuals. If your business suffered a decrease in income of 25 percent or more due to the economy, the failure to pay penalty will be abated.
This penalty relief is subject to income limits. 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.
The failure to pay penalty is half of one percent per month with an upper limit of 25 percent. Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available at IRS.gov.
Make sure you always file a tax return, even if you can’t pay. The failure to file penalty is 5 percent per month capping out at 25 percent on any unpaid tax liability. Between that and the failure to pay penalty you could be looking at some expensive penalties. So if you can’t file your return by April 17, 2012, file an extension. That will give you until October 15, 2012 to file and pay your taxes.
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