Simply because they have never heard of a particular government form, many thousands of taxpayers will pay costly civil penalties to the Internal Revenue Service this year.
It is difficult to determine the precise number of such taxpayers, but in 1996 the Internal Revenue Service assessed 13.1 million taxpayers a total of $1.2 billion in civil penalties for failure to pay taxes.Many of these people could have avoided the penalties. Had they known about IRS Form 1127, they would have recognized that the IRS may allow taxpayers to delay payment by up to six months during which interest, but not penalties, are assessed.
The form is so little known that some IRS employees are unaware of its existence, and the agency does little to publicize it. Moreover, it is not readily available.
Instead, most people caught in a financial bind use IRS Form 4868, which allows for an automatic four-month extension for filing. However, in using this form both taxes and civil penalties are assessed on any tax owed in the interim.
The payment extension, as distinguished from the filing extension, is not granted automatically. Taxpayers must show that unforeseen circumstances beyond their control, such as medical bills, made it impossible for them to pay by April 15.
In each instance, however, one or the other form must be filed by the April 15 deadline. And if Form 1127 is used, the tax return itself must be filed on time.
Tax litigation consultant Dan Pilla, who teaches tax professionals the ins and outs of the tax law and who has written nine books on the tax system, has done his best to inform the public about Form 1127, but it is still little understood.
Pilla, whose offices are in the St. Paul suburb of White Bear Lake, Minn., says he's had a difficult time learning why the form is so little publicized, since inevitably many thousands of taxpayers might benefit from its use.
The only explanation ever offered by the IRS, he says, is that it would create confusion, a somewhat ironic response in view of 17,000 pages of tax rules and regulations that often confuse the IRS itself.
The two forms, Forms 1127 and Form 4868, are not the only means by which pressured taxpayers can delay the inevitable. Using IRS Form 9465, a filer who owes taxes but cannot pay the full amount immediately can request an installment agreement.
In worst-case situations, there is tax amnesty, although this aspect of the tax law also is little known.
Using IRS Form 656, accompanied by IRS Form 433A, a taxpayer may submit an offer in compromise, conceding that the full amount is owed but pleading and proving that the total is unaffordable, and suggesting an amount that is financially feasible.
Proving such a case is not easy, but the results can be dramatic and relieve the taxpayer of mounting penalty, interest and compounding of debt that could only worsen matters. The average settlement as of last November was 13 cents on the dollar.
Pilla, a researcher who has delved into the most obscure alleyways of the IRS code, has made taxes his life's work: writing books and articles, appearing on TV and radio programs, conducting seminars and training lawyers and accountants.
Much of the information used here is contained in his Tax Amnesty Forms Kit, which includes the book "Tax Amnesty."
The Tax Amnesty Forms Kit is available for $19.95 postpaid by calling 1-800-34NOTAX, or from Winning Publications, P.O. Box 548, Hugo, MN 55038.