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Help! Withholding error produces overdue tax bill


Dear Tax Talk,
My husband's employer only began to deduct taxes from his paycheck in July of 2002, which left my husband with half a year of tax debt. We filed jointly, so the debt belongs to both of us and it's about $1,200 to state and federal revenue offices. We filed an extension and an additional extension because we were afraid that we didn't have all the information we needed. We worried about the best way to file, since we could not get together at a tax agency to get the taxes done during business hours. So, we finally just did it ourselves, and we have our fingers crossed about the penalties and interest the tax might have accrued. What are we probably looking at for an amount of $1,200 for 2002, which we have not yet paid? We plan to pay $100 a month beginning next month. I am worried because someone told me we could end up paying double what we "owed" at the end of 2002. Is there anything we can do to keep from incurring a whole lot of penalties and interest, or is it too late? -- Theresa

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Dear Theresa,
The best thing you did was to apply for the original extension on April 15 and apply for the second extension on Aug. 15. I assume you also mailed your tax return by the extended due date of Oct. 15.

In addition to interest on unpaid tax, the Internal Revenue Service also imposes penalties. If you fail to pay your tax when due (April 15 in your case), the penalty is 0.5 percent per month for each month you do not pay. This means that the IRS will charge you 3 percent or $36 in addition to interest for not paying through Oct. 15.

If you can't pay the full tax, you can enter into an installment agreement with the IRS by filing Form 9465. The cost is $43, but the benefit of the installment agreement is that it will give you more time to pay, and the penalty for not paying is reduced to 0.25 percent per month. Since you may not be able to put off IRS collection activities until next year's tax filing, it's probably a good idea to apply for the installment agreement if you can't borrow the money more cheaply.

If you have dependent children under age 17, the IRS will refund you $400 for each child after it processes your 2002 return. This refund would offset what you owe, so that maybe you can pay off the balance more quickly and avoid the $43 fee for the installment agreement.

You'll need to contact your state's revenue department to determine what options it provides. Links to your state tax office can be found on Bankrate's individual state tax pages. Remember that you can itemize your state income taxes as a deduction when paid, but not penalties and interest.

If you hadn't filed the extension, the penalty for not filing would have been 5 percent up to 25 percent of the unpaid tax. This, together with interest and the late payment penalty, would have added a substantial amount to the unpaid tax. In the span of a couple of years, you could have ended up owing double what you originally owed.

-- Posted: Oct. 29, 2003




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