UPDATE: CompleteTax says its users will be able create the new IRS Form 1127A within its guided tax-prep product--rather than having to link to the IRS--as early as Saturday, March 31.
Nothing adds insult to injury like owing money to the IRS when you've been unemployed. The IRS is seeking to address that with additions to its "Fresh Start" program, announced earlier this month.
The agency says it will offer a six-month grace period on its failure-to-pay penalty for certain taxpayers who have experienced recent unemployment. Eligible taxpayers can put off paying all or a portion of their 2011 tax bill until October 15, and not worry about being charged the IRS's failure-to-pay penalty, which is 0.5 percent per month, up to a 25-percent maximum.
However, taxpayers still will owe interest on their unpaid taxes, which the IRS is required to collect. Currently, that interest rate also is 0.5 percent per month for every month the tax bill isn't paid.
To qualify for the grace period, the taxpayer needs to have been unemployed for at least 30 consecutive days, either in 2011 or through April 17, 2012. There are other eligibility requirements. For instance, adjusted gross income must not exceed $100,000 for single filers and heads of household, and $200,000 for joint filers. The maximum tax liability covered by the program is $50,000.
To participate, you need to fill out IRS Form 1127A and send it to the IRS address on the instructions. Don't attach it to your tax return. You can utilize Form 1127A even if you've already filed for 2011, the IRS told us. In all cases, your Form 1127A must be postmarked by April 17. You also must file your tax return, or IRS Form 2350, an application for an extension to file, by April 17.
Makers of the four leading tax-prep programs--CompleteTax, H&R Block At Home, TaxACT and TurboTax--told us they don't offer Form 1127A. CompleteTax, TaxACT, and TurboTax provide links to the form. An H&R Block spokesman told us that customers using Block storefront offices should contact those offices if they need help filling out the forms. The company is designing a promotion around the new IRS program; check H&R Block's Web site for details in coming weeks.
This program, like other payment alternatives offered by the IRS, is a better deal than forestalling payment by putting it on your credit card. As we've written, unless you're the type who pays the entire balance every month, you run the risk of racking up serious interest costs, far higher than what the IRS is charging. The IRS offers other options to pay a big bill, including an installment program.