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April, 2003 Tax Tip

Don't Incur Late Filing Penalties

Because of the fast approaching filing deadline, I thought it might be appropriate to revisit the Tax Tip I wrote last year regarding late filing of tax returns.

Many taxpayers who are short on funds when their taxes are due tend to delay filing their tax return. This is very unwise. There is a failure-to-file penalty (5% per month or fraction thereof) of the balance due for up to five months that is applied to taxpayers who miss a filing date without a proper extension for filing their return.

Note: A taxpayer can put off filing a return — and avoid the failure-to-file penalty — by getting an automatic extension to file (up to four months) by filing Form 4868. One important caveat: The estimate of the ultimate tax liability shown on Form 4868 must be reasonable, or the extension can be retroactively revoked.

If a taxpayer doesn’t have the funds to pay the tax due at the time of filing (either the return itself or the extension request), he or she should still file on or before the due date and pay as much as possible to keep down the interest payments as well as to show good faith.

Note: In addition to the failure-to-file penalty, there is also a less expensive penalty (1/2 percent per month or fraction thereof) for failure to pay tax on time. This penalty doesn’t apply during the four-month extension period of Form 4868, if at least 90% of the tax due is paid by the return due date, through withholdings, estimated tax or with the Form 4868.

TIP: If you have not filed a tax return for a previous year, call me. Your problem may not be as great as you think. It is normal for most people to lose sleep over such things. Perhaps I can help put your mind at ease.

Where a taxpayer cannot, in good faith, pay the tax, IRS will generally work out a payment schedule after it has reviewed the taxpayer’s financial condition. In addition, an installment agreement (Form 9465) can be submitted with the tax return. On this form, the taxpayer indicates the amount, if any, he is remitting with the return, and sets forth the monthly payment he agrees to make and the date of each month he wishes to make it. In many of these cases, the taxpayer's financial condition is not reviewed.  It should be noted that the filing of Form 9465 does not stop the interest and the late payment penalty from continuing to run.


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