This year the deadline for filing your 2017 income tax return is April 17th. The usual deadline is April 15th. However, this year the 15th will fall on a Sunday. Usually when this happens, the deadline is pushed to the following Monday. However, this year Monday, the 16th of April is Emancipation Day. As a result, the deadline is Tuesday, the 17th.
So, what if you find yourself in the middle of summer, and you still haven’t filed your tax return. What’s going to happen? That depends on whether Uncle Sam owes you money or you owe Uncle Sam money.
If you have a tax refund coming, not much is going to happen. There is no immediate penalty for not filing a tax return if the government owes you money. The IRS will be more than happy to keep the money owed to you in the U.S. Treasury. Of course, you won’t get your refund until you do file and if you wait longer than three years to do your taxes, the IRS doesn’t have to pay you at all.
However, if you owe the government money, the situation is more serious and will continue to get worse the longer you delay. So, the issue now becomes one of damage control. Every day that you wait to file your taxes, you are getting deeper and deeper into debt to the IRS. To stop that debt from growing, here’s what you need to do:
- File for a six-month extension using form 4868 on or before the April 17th deadline for filing your return;
- File your tax return as soon as possible and no later than the extension deadline of October 15th; and,
- Pay as much of the taxes that you owe as early as possible.
Electronic filing is the quickest way to get an extension. It’s also the quickest way to get your return into the hands of the IRS, once your return has been completed. Most online tax preparation software companies will let you use their software for free if your income does not exceed a certain threshold. Otherwise you may have to pay them to use their software or prepare your return yourself using free forms that the IRS provides online. Either way, you can file your return electronically anytime before October 15th using IRS Free File.
Remember, if you owe money, the government is charging you interest on the amount owed. So, every day that goes by after the usual filing deadline in the middle of April without payment means that you owe more money to the IRS. That’s why it’s important to try to pay as much of your tax debt as soon as possible. If you’ve filed your return and paid as much as you can, but you still have a balance due, you need to get in touch with the IRS and ask if you qualify for one of the following:
- A payment extension due to undue hardship (File Form 1127); or
- An installment agreement (File Form 9465 or go to https://www.irs.gov/payments/online-payment-agreement-application; or
- An Offer in Compromise.
A payment extension and an installment agreement can be applied for online. It should be noted that there is an application fee for an installment agreement. If you choose to make an Offer in Compromise, you are very likely going to need the assistance of an experienced tax attorney or tax professional. The process itself is complicated. A tax attorney can make sure that you have all of your paperwork filled out correctly and filed with the IRS at the right address and timely. He or she can also assist you with figuring out what offer the IRS is most likely to accept.
How Can I Avoid Late Tax Payment Penalties?
The best way to avoid late tax payment penalties is by filing your return and paying your taxes on time. Absent that, you have to ask for an extension and file and pay your taxes within that six-month extension period. If you miss the extension deadline, you have to get your tax return prepared and filed as soon as possible. The reason for this is that the penalties for failing to file a return are much more severe than the penalties for failing to pay your taxes. Here’s a comparison:
- Failure to File – 5% interest per month on the tax balance up to a maximum of 25%;
- Failure to Pay – 0.5% interest or ½ of 1% per month on the tax balance up to a maximum of 25%;
- If you fail to file and pay, both penalties apply, but the Failure to Pay penalty is subtracted from the Failure to File penalty.
Under no circumstances should you underpay your taxes, unless you have a valid payment extension or installment agreement with the IRS. The penalties for underpayment are severe, especially in situations where the IRS believes that the underpayment was deliberate or willful.
If the IRS finds that you underpaid your taxes, due to negligence or carelessness, recklessness, or intentional disregard of rules and regulations, you will be penalized, in addition to the penalties described above. However, if the IRS finds that you intentionally underpaid your taxes with criminal intent, you may be charged with:
- Negligence; or,
- Filing a frivolous return.
The penalties here can range from a steep fine to actual jail time. Remember, the worst thing you can do is ignore the situation. The IRS is not going to forget you or your debt. They will eventually discover that you haven’t filed your return(s) or paid your taxes and they will take corrective action and make sure that you do both. By filing your return, you demonstrate to the IRS that you acknowledge your tax debt, you are acting in good faith and that you are working on resolving the situation.
If your entire tax debt (including interest and penalties) is less than $100,000 and you know that you will be able to pay your entire tax debt within 120 days of filing your return, you should request a short-term payment plan (payment extension). Your penalties and interest will be lower with a payment extension than with an installment agreement.
If your entire tax debt (including interest and penalties) is $50,000 or less, and you cannot pay the debt within four months, then you should request a long-term payment plan (installment agreement). You can do this via an interactive Online Payment Agreement (OPA) application which is available at https://www.irs.gov/payments/online-payment-agreement-application. Otherwise a taxpayer can request an installment agreement by filing form 9465. The IRS charges a small fee for processing such request. The amount of this fee will depend on how the payments will be made, i.e., by check or direct debit of your checking account.
Finally, an Offer in Compromise is a way to reach an agreement with the IRS to pay a smaller tax amount than you owe. As was noted above, Offers in Compromise are complicated matters, sometimes take a year or more to process at the IRS and are not routinely granted. If you’re going this route, you should seriously consider hiring an experienced tax attorney or tax professional to represent your interests in the process.
In the end, income tax liabilities will not simply go away. The government will do what needs to be done to get the money that’s owed. Unpaid tax obligations can quickly overwhelm you. This is where an experienced California income tax attorney or tax professional, can help to – 1) make sure the tax assessment against you is valid, 2) assess your available options and 3) guide you through the appeal and tax payment process using their knowledge of tax laws to help you achieve the best possible outcome. Contact us today for a free and confidential consultation.