Tax procrastinators: File now or pay the price
By Kay Bell • Bankrate.com

If you've yet to file your 2006 tax return, your time is almost up.

All Form 1040s must be en route to the Internal Revenue Service, either postmarked or sent electronically (and remember that the Free File option is still available for eligible taxpayers), by midnight Oct. 15.

This also is the first filing deadline faced by some Virginia taxpayers. Special filing consideration was granted this year to persons affected by the shooting on the Virginia Tech University campus April 16. The IRS gave them six more months to file and pay their federal tax obligations.

Some Louisiana taxpayers also get a bit more time. Residents of Jefferson, Orleans and St. Martin parishes, areas that were designated as presidential disaster areas because of severe storms and tornadoes last February, get until Oct. 24 to submit their 2006 tax returns. These Louisiana taxpayers, however, must have filed an extension request and paid any taxes they estimated they would owe by April 24.

But taxpayers in the rest of the United States who asked for more time -- and who paid an approximation of their 2006 tax bill when they did -- must finish the filing process by the Oct. 15 deadline, or pay the price.

Costly procrastination
Around 9 million taxpayers filed Form 4868, the Application for Automatic Extension of Time to File, back in April. The nice thing about the form is that it gave you six months to file your 1040.

The extension, however, was for filing paperwork only, not for paying the tax you owed. So when you filled out that form all those months ago, you did estimate your final bill and send payment in, right?

If not, or if your tax payment projection was way off, further filing delay could cost you even more. That's because tax law allows for assessment of late-filing and late-payment penalties.

When taxpayers don't file on time and owe money, the agency can charge a failure-to-file fee of 5 percent of your total tax bill, which consists of a 4.5 percent late-filing fee and a 0.5 percent late-payment penalty. It's assessed for each month, or part of a month, that tax is due and can accumulate until it hits 25 percent of the tax bill.

The IRS is prohibited from simultaneously imposing both late-filing and late-payment penalties, so the agency waives the nonpayment fee for the months that a filer procrastinates. That provides a bit of a break, if you consider a 22.5-percent nonfiling penalty a break, to those who've gone all these months without filing or paying anything.

If you continue to shirk tax requirements beyond the ultimate October deadline, the eventual assessments could mean you have to hand over a considerable check to the feds. The agency could ultimately slap you with a total penalty charge of up to 47.5 percent (22.5 percent late-filing fee plus 25 percent late-payment charge) of the tax owed. For returns that are more than 60 days late, the minimum failure-to-file penalty is the smaller of $100 or 100 percent of the tax due.

The late-payment penalty is automatic when a return showing tax due is sent without payment. The IRS can waive the late-filing penalty if you show reasonable cause, determined by the agency, as to why you didn't meet the filing deadline. Rest assured that any excuse you use will be closely investigated.

And don't forget that Uncle Sam, like any other creditor, tacks on interest charges, compounded daily, to any unpaid tax bill. For the last few years when interest rates were at historic lows, the charge was more tolerable. But now that rates have started to rise, so will the extra amount you'll owe Uncle Sam.

The tax agency's interest rate is the federal short-term rate plus 3 percentage points. It is reset every three months. Between Oct. 1 and Dec. 31, the agency will collect interest at 8 percent.

Take your time paying
If the root of your late- or nonfiling situation is a lack of cash on hand, then it's time to explore other ways to pay.

If you expect to eventually meet your full tax obligation, the IRS accepts installment payments (Form 9465). You even get wide latitude in setting up terms that fit your financial situation. In fact, if you've previously filed and paid taxes on time, your tax bill is less than $10,000 and you convince the agency that you can't come up with that much all at once, the IRS can't turn down your request. Your installment plan, however, must pay off the due tax in at least three years.

And installment tax payment carries some additional cost.