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Preparing for ‘Extension Season:’ Threats & Consequences

Completed your individual income tax return yet?

Until April 15, we controlled reporting our annual income properly and filing available deductions and credits to minimize what we owe Uncle Sam in fulfillment of our civic duty. Beginning April 16, the IRS took control.

  1. The IRS checks the math and analytics of each return against the law and typical taxpayers of similar earnings, family dynamics and income sources.
  2. Then it starts assessing late charges for any tax it determines is still due.

If you owe tax and don’t file on time, a penalty exists for filing late. Carefully consider the costs of paying your taxes late against your other sources of funds. So what can they charge us for paying late?

In most cases, interest accrues on unpaid balances from the due date of the return until the date payment is received. The current interest rate—determined quarterly—is the federal short-term rate plus 3 percent, which compounds daily.

…And that’s not it.

If your tax isn’t fully paid on time, you’ll likely pay a late payment penalty of one-half percent (½%) charge for any part of every month that balance is not paid.

The monthly rate jumps to a full 1% when your tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. However, if you file your tax return on time and arrange payment with an approved installment agreement, the ½% drops to ¼% as long as the installment is in effect.

Regardless of the accrual rate, the total penalty will not exceed 25% unless you become chronically delinquent.

The failure to file penalty is a more severe 5% monthly of any tax owed, for a maximum of five months. If you file more than 60 days late though, the minimum penalty is the lesser of $135 or 100% of the unpaid tax.

Your IRS payments apply first to taxes, then penalties and finally, interest. Therefore, any billing notice you receive provides accumulated penalties instead of the current penalty accrual.

You can avoid these penalties for both filing and paying late by proving “reasonable cause” you didn’t willfully neglect deadlines and attempted to pay outstanding balances.

If you feel you qualify for abatement, send an explanation to the address on your bill within the stated deadline, or call the IRS at 800-829-1040 for assistance. Generally, the IRS doesn’t reduce interest charges, which continue to accrue until you fully pay all assessed tax, penalties and interest.

See http://www.irs.gov/taxtopics/tc202.html for information about payment options.

To make sure your payment properly credits your account, return the tear-off stub on your bill and use the return envelope, if provided. Ensure you:

  • Make your check or money order payable to the United States Treasury
  • Enter the primary Social Security number or employer identification number
  • Enter the tax year and form number
  • Ensure your name, address, and telephone number are on the payment
  • Do NOT send cash

For more information about ensuring proper credit of payments, see Topic 158.

Remember the exceptions to the general deadlines for filing a return and paying tax, such as:

  • If you’re a member of the Armed Forces and serve in a combat zone, refer to Publication 3, Armed Forces’ Tax Guide, for additional information and qualifications.
  • If you’re a citizen or resident alien working abroad, refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for details.

The IRS can also extend filing and payment deadlines in certain disaster situations. For more information, search keyword “disaster” on IRS.gov.

Closely review any notice or bill you receive. If you find an error, write to the IRS office that sent the document within the timeframe given, providing photocopies of any records to help correct the error. You may also call the number listed on your notice or bill for assistance. The IRS will adjust your account and send you a corrected notice if necessary.

For more information about IRS notices and bills, refer to Publication 594 (PDF), The IRS Collection Process. For more information about penalty and interest charges, refer to Part One, Chapter 1, Filing Information, of Publication 17, Your Federal Income Tax for Individuals.

The team of tax accountants at Patrick & Robinson CPAs hopes you find this information helpful. If you filed for an extension, and need help completing your taxes, contact us at 904-396-5400 or office@CPAsite.com.

The October 15 extension deadline seems far away, but it’s never too early to file!

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Frequently Asked Questions

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Filing before April can make your tax refund come back faster, but filing too close to the deadline could cost you money.

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