This is not an unusual situation. I would strongly advise you that you file your tax return as soon as possible without any delay. The delaying of filing the tax return would simply incur you more penalties and interest on the underpayment.
The extension you filed was based on a lower tax liability, thus in reality the additional tax liability is now going to be subject to penalties and interest.
I think you may have a possible way to request an abatement of penalties and interest by writing to the IRS and informing them that the understatement of tax liability was based on an erroneous computation of income. Furthermore, if you relied on erroneous third party information, that is, a K-1 that was incorrectly prepared or corrected subsequently with substantially higher income, the IRS may grant you an abatement of penalties and interest.! From my experience, the interest abatement has generally not been granted, but worth a try!
You should file the tax return ASAP and make a partial payment to the best of your ability in an attempt to pay for the balance of the tax liability. The IRS will respond within 30 days generally with a bill for the balance of the tax liability along with any interest and/or penalties. I would suggest that you at that point perhaps you should write a short letter explaining your current hardship and request a 6 month payment plan to pay the liability and including a first payment towards this liability.
It is important to realize that you cannot miss these payments and if you do than the agreement would be voided and IRS can demand for the balance of the liability immediately. So, ensure that you can make these 6 month payments on a timely basis!
Last edited by TaxGuru : 05-25-2007 at 06:25 PM.