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• If you file your return or extension request on time, however, the penalty drops tenfold to only 0.5 percent per month, plus interest.
• Here's how it adds up: Say you owe $2,500 in federal income tax. If you haven't requested an extension, you would be charged an additional $125 (5 percent), plus interest, for each month you're late in paying off your bill. Had you filed for an extension, the penalty would drop to only $12.50 per month (0.5 percent).
• Be sure to contact the IRS early if you won't be able to pay on time so you keep as many payment options open as possible - either call 800-829-1040 or visit your local IRS office. Also check out the IRS' "Filing Late and/or Paying Late" webpage for helpful information (www.irs.gov).
• One way to avoid this penalty is to pay by credit or debit card before the filing deadline. You'll pay a convenience fee, which is tax-deductible if you itemize. Fees vary depending on which payment processor you choose. (See "Pay Your Taxes by Debit or Credit Card" at www.irs.gov for details.) If you use a credit card, make sure

you can pay off the balance within a few months; otherwise the accrued interest might exceed the penalty.
• Other payment options include:
• • If you can pay the full amount within 120 days, you may qualify for a Short-Term Extension. If granted, you'll still owe interest on your debt, but will avoid the application fee for an installment agreement.
• • If you need longer than 120 days, an Installment Agreement lets you pay off your bill in monthly installments.
• • To apply for either, fill out an Online Payment Agreement Application at www.irs.gov or call an IRS representative at 800-829-1040.
• • Under certain dire financial-hardship circumstances, the IRS will allow some taxpayers with annual incomes of up to $100,000 to negotiate a reduction in the amount owed through an Offer in Compromise. For step-by-step instructions, read the IRS Form 656 Booklet.
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• If you're unable to make payments on your installment agreement or offer in compromise, call the IRS immediately for alternative payment options, which could include reducing the monthly payment to reflect your current financial condition.
• Also read the IRS's guide, "The What Ifs for Struggling Taxpayers," which contains helpful information on the tax impacts of different scenarios such as job loss, debt forgiveness or tapping a retirement fund.
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