Archive for the ‘late filing penalty’ Tag

Tax Deadline Looms

Originally published in the Cedar Street Times

April 4, 2014

If you have been hibernating through the winter months, it is time to awaken from your slumber and complete your tax returns for 2013.  As a tax professional it is interesting to see how each tax season seems to take on a flavor of its own.  This year I found that many clients did not come in early, but delayed gathering their tax information, and came in much later.  Another professional in the area called me last week and said he was experiencing the same issue.  Compressing an already compressed time frame certainly makes for long hours, and will probably lead to more extensions as well.

Over the past few years, new rules have been phasing-in which force financial companies to report cost basis in the stock they sell on your behalf.  (Generally I like this new requirement as I have to repaint my ceiling much less frequently as clients are no longer staring at it so intently to come up with the basis in the stock they inherited  thirty years ago.)  I recall last year, we had many clients with revised 1099 financial packages being issued well into late March.  Although I did not see a lot of late issued/revised financial packages this year, I have a feeling that has something to do with why many people opted to bring in their information later.

Technically, you are supposed to file an amendment if additional information surfaces that was not reported on your original returns.   This can be cost prohibitive, however, especially if it consists of minor changes.  If these items are missed, sometimes the IRS will just send a proposed adjustment and basically rework the tax return for you and propose a balance to pay.  California’s Franchise Tax Board will typically follow-up as well once they get wind of the issue from the IRS..

If you cannot get your returns completed on time, then you may wish to file an extension.

If you are filing your own extension for your personal tax returns with the IRS use Form 4868.  Be sure to get some kind of proof of delivery and make a copy of the extension.  Even with delivery confirmation it is difficult to prove what you sent.  The best way is to e-file the extension through home-use tax software or by using a tax professional that e-files and obtains an electronic submission ID (the new modernized e-file system replaces the old declaration control number system with submission IDs).  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I continue to applaud California for this one act – you need not file a form to be granted an automatic extension! After you have filed your federal extension you have until October 15, 2014 (six months) to file your California personal return as well.

BEWARE!!  Just because you file an extension does not grant you additional time to pay!  The tax you calculate on the return you are going to prepare and file by October is still due by April 15.  So if you think you might not have enough tax withheld, you need to make some good estimates and send in some checks.  You may want to hire a tax professional to help with this calculation.  You can send the federal check with Form 4868.  For California, you can use FTB Form 3519 to send with your check.  There are also electronic options for paying both of these.

If you do not pay your tax or file your return on time, interest and penalties are calculated based on any amount of tax you come up short. Interest varies with market changes (currently three percent a year for the IRS and California).

If you file an extension, but do not pay in enough tax by April 15, you will pay late payment penalties and interest.  The IRS late payment penalties are a half-percent of the balance each month (up to 25 percent).  California will charge you five percent up front plus another half percent of the balance each month (up to 25 percent).

If you fail to file an extension or file after the extended due date, the IRS and California penalties are each five percent of the balance each month (up to 25 percent).  California has an additional trick.  If you extend your return and then file late, they go all the way back to the original due date to calculate penalties and interest owed as if you never had an extension.

You may also incur underpayment of estimated tax penalties depending on your circumstances.

One other nice thing to know: if you owe no tax, you will owe no penalties, even if you file late.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Can’t Finish Returns by October 15 Deadline?

Originally published in the Cedar Street Times

October 5, 2012

If you placed your 2011 personal tax returns on extension, you have 10 days left to complete the returns and get them filed.  This is especially important if you did not withhold enough tax or make enough estimated tax payments during the year to cover your tax liability that was technically due on April 17.  Penalties are assessed based on the unpaid balance of tax that was due on that date.  There are several penalties assessed, but the hefty penalty is the late filing penalty which equates to five percent of your unpaid tax as of April 17 for each month or part of a month the return is late (capped at 25 percent).

In the past, I have had problematic situations where a client did not receive tax documents until after October 15.  This is sometimes seen when a client is invested in a partnership or has an interest in an S-Corporation or LLC and that entity is filing their returns late – causing all the others to be late as well.  There are even situations when other entities are filing timely and it can cause you to be late.  An example of this would be if you were a beneficiary of an irrevocable trust.  These types of trusts generally have the same due dates that your personal returns do – April 15, with a six month extension to October 15.  What if the trust is completed at the end of the day on October 15?  Will the beneficiary be able to get their K-1 tax document and provide to their accountant to finish before midnight!!  Maybe not!

So what do you do if you still cannot file by October 15?  Is there any hope?  There are some specific exceptions for military service members and taxpayers working abroad, but if you do not qualify for those exceptions, what then?  One option would be to wait until the information is received and then file the return requesting penalty relief for reasonable cause.  This is a tough row to hoe in actuality, because the IRS places a high degree of responsibility on the taxpayer:  I can almost guarantee you that what you feel is reasonable will not be the same as what the IRS feels is reasonable!  You will be categorized as delinquent from the outset, and then you will start on the defensive.

A better solution in many cases would be to go ahead and file a tax return with the information available and your best estimate of any missing information.  (There are provisions in the code that allow for estimates under certain circumstances.)  A statement should be included with the return explaining the situation and the efforts made to obtain the information.  You should also state the intent to amend the return if materially different from the actual information when it is available.  This would prevent a late filing penalty from being assessed, and you would be categorized as timely filed unless the return is challenged by audit.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Paying the IRS: Installment Agreements

Originally published in the Pacific Grove Hometown Bulletin

May 2, 2012

Hopefully by now you have filed your tax returns.  If you decided to file for an extension, that is fine, but keep in mind you have not extended your time to pay any tax owed.  That was still due on April 17th.  Filing the extension was key, however, because a late filing penalty is assessed at five percent of the balance owed for every month the return is late (capped at 25 percent).  If you do not owe taxes, you are fine, even if you did not file an extension, since the penalty is based on the balance owed.

If you did file your return and you could not come up with enough cash to pay the IRS, you have payment options.  If you feel you can pay the IRS within 120 days, call 1-800-829-1040 and advise them of this fact and they will not harass you for payment and you can avoid the cost of setting up an installment agreement.

If you need to make payments over time by setting up an installment agreement, the IRS will generally allow this quite easily if your balance is below $25,000, you can pay it off in seven years, and you are in good standing with the IRS.  This is accomplished by filing Form 9465.  There is a $105 fee to set up an installment agreement, unless you elect electronic payment withdrawals from your bank – this cuts the fee down to $52.  Interest accrues at a variable rate which changes every quarter (currently three percent per annum) and late payment penalties may also still be assessed (1/2 percent per month, or portion thereof – approximately six percent per annum).  Other minor penalties may apply also.

In practice, I have never had an installment agreement under $25,000 turned down or even questioned by offering a monthly payment amount equal to the starting principal balance divided by 60. If you owe over $25,000, you have to provide detailed information about your financial situation through additional forms before an installment agreement is granted.  With an installment agreement in place, you avoid harassing letters and other possible collection actions such as levying bank accounts, garnishment of wages, forcing the sale of assets, etc.  (Forcing the sale of assets is rare unless you owe at least $100,000…and are obstinate!)

If you have large tax debts that may be difficult or impossible to pay there are other less friendly avenues such as offers in compromise, or even bankruptcy filing if the tax debts are at least three years old.

California has a less generous installment agreement option, but can be requested by filing FTB Form 3567.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.