Taxes: Put 'Em Off, but Don't Blow 'Em Off

Don't be embarrassed to admit it.

Tax season's ominous April 15 deadline is next week -- but maybe you haven't organized your paperwork or made your estimated payments.

Ignoring the mess is a tempting option. But filing for an extension is a more prudent alternative, according to Mark Luscombe, principal federal tax analyst for CCH, a tax-information provider. "The one thing that can make a bad situation worse is not filing your return or [not] requesting an extension," he says.

Snubbing the IRS means you'll incur a failure-to-file penalty -- 5% of the tax due for every month or any fraction of a month that the return is overdue, up to 25%. There's also a minimum penalty for any return not filed within 60 days of the due date, plus extensions, of $100 or 100% of the tax due, which ever is less. Filing for an extension, however, can spare you this scenario.

The IRS grants an automatic six-month extension to taxpayers who submit Form 4868 (Automatic Extension of Time to File). Luscombe says you should also estimate your ultimate tax liability and pay as much of it as you can by the normal April 15th due date.

You'll be in good company.

The IRS expects to receive 10.3-million extension requests in 2008 compared with 10 million-extensions received during 2007. It estimates that about 2-million taxpayers will file for extensions electronically.

Why the Procrastination?

The discussion about late filing begs the question: Why do so many taxpayers file late when they have months to prepare?

"People are creatures of habit," says Bruce E. Brabec, a CPA in Edina, Minn. "They wait -- maybe they don't want to deal with the paperwork or getting it all together, until the proverbial gun is put to [their] head." Brabec says his clients submit their paperwork to him usually within a week of when they submitted during the previous year.

There are also legitimate reasons for filing late, says Robert J. Fendrick, an Atlanta-based CPA. Business owners who are behind on their bookkeeping, or awaiting IRS Schedule K1 -- a form that reflects income from a partnership -- are among those who often file for extensions, he says.

The difficulties of finding a tax preparer who can accommodate you this week may also be a reason to file for an extension. "It's crunch time now for everybody. Most preparers are pretty backed up already," says Brabec. Clients who are first approaching him within the coming days won't be able to file their completed returns on time, he says.

Paying What You Don't Have

Taxpayers are also sometimes weary of filing because they can't pay what they owe, according to Fendrick. However, the 5% failure-to-file penalty only makes the situation worse, he says. H&R Block, the national tax preparer service, advises that taxpayers file, even if they can't pay. The penalty for failure to pay is only .5% each month on the unpaid balance -- far less than the 5% for failure to file.

There are two options for paying a tax debt over time -- and they're both more economical than trying to ignore the problem, according to Luscombe of CCH. Taxpayers who owe can either use a credit card or arrange an installment agreement with the IRS.

You can pay your taxes using a credit card via several online services such as Pay1040.com or incometaxpayment.com.

Expect to incur convenience fees of 2% to 3%, but that may be lower than what the IRS charges for an installment agreement, says Luscombe. You can also earn frequent flyer miles and other perks associated with your card, he says.