April 15th will be here before you know it. And as everyone knows, that's the due date for filing your income tax returns.
If you can't finish your returns by April 15th, what should you do? Simply complete and submit a Form 4868 with the IRS, and you'll automatically be granted an additional four months to file your tax returns. While the IRS gladly gives you additional time to submit your paperwork, they don't give you any extra time to pay the taxes that you owe. To avoid being assessed interest and penalties, it's important to determine the amount of taxes you owe for 2002, and pay in that amount with the extension request.
If you can't pay all of the taxes you owe by April 15th, consider filing for an extension, even if you can complete your tax returns on time. As long as you'll have 90% of your total tax liability paid in by April 15th, you won't be hit with hefty IRS penalties on the balance due. The IRS will assess you interest on the tax shortfall, as well as a "failure to pay" penalty of 0.5% per month, but for many people, this is less than the rate of interest they're paying on their credit cards.
And if you're self-employed, filing for an extension will give you an extra four extra months to fully fund your retirement plan. Under the current rules, you can generally deduct contributions made to your retirement plan, prior to the due date of the tax return, including extensions. One strategy common to self-employed individuals is to pay the full amount of taxes due on April 15th with the Form 4868, and then fund their retirement plans prior to August 15th.
Does filing for an extension increase your chances of being audited? I have clients who are convinced that filing for an extension is a red flag with the IRS. And I have others who always file for an extension because they've heard that they're less likely to be audited by doing so. Personally, I've never seen any connection. But it's always fun listening to everyone's theories on this topic, especially around April 15th.
What should you do if you owe money to the IRS for your 2002 taxes, but don't have enough money to pay what you owe by April 15th? Here are a few suggestions to help you buy some time:
If you can pay most of your taxes by April 15th
If you're able to pay at least 90% of your total tax liability, as reflected on your Form 1040, all you need to do is file for an extension of time to complete your tax returns. This strategy allows you to defer paying as much as 10% of your 2002 federal income taxes until August 15th. Keep in mind that the IRS will assess you interest on the balance due (of approximately 7%), plus will also assess a "failure to pay" penalty of 0.5% per month on the balance due. So expect to pay an additional 13% on any money owed to the IRS.
To file for an extension, simply complete and submit a Form 4868. Remember, for the extension request to be valid, you need to have paid in at least 90% of your total income tax liability prior to April 15th. Otherwise, your extension could be deemed null and void by the IRS, and you could end up being hit with the 5% per month "failure to file" penalty.
If you'll be able to come up with the balance due in the not too distant future
Let's say that you don't have enough money to pay your taxes by April 15th, but anticipate getting the money to cover the shortfall during the next month to six weeks. If you're in this boat, make sure to file your tax return by April 15th, and include a check to the United States Treasury for as much as you can afford to pay at that time. During the month of May, the IRS should send you a bill reflecting the balance of taxes that are due. Soon after receiving the bill, send in a check to the IRS paying off the total amount due.
Don't forget that you'll owe interest, plus the "failure to pay" penalty of 0.5% per month, on the outstanding balance.
If you need more time to pay off the taxes that are due
One other alternative is to enter into an installment arrangement with the IRS. This is done by completing and filing a Form 9465, and attaching the completed Form 9465 to the front of your federal income tax return. On this installment request form, you tell the IRS how much you can afford to pay each month and the day of the month that the payment will be made.
The IRS charges a fee of (around) $43 to any taxpayer who enters into an installment arrangement. In addition, the IRS will charge interest at 7% per month, and a "failure to pay" penalty of 0.5% per month on the outstanding balance. Plus, failure to make a scheduled payment will cause the remaining outstanding balance to become immediately due.
The Last Resort - Offer in Compromise
If the amount you owe is so large that you can't pay it off through an installment plan, you're last resort is to enter into an "Offer in Compromise" with the IRS to try to get them to reduce the amount of taxes owed. You can find information on Offers in Compromise on the IRS' website (www.irs.gov).
Always Submit Your Tax Return on Time
As you can see, if you owe money to the IRS, you can expect to be charged interest, plus a "failure to pay" penalty of 0.5% per month, on the amount owed.
The penalty for not filing your tax returns, however, is a whopping 5% per month, up to a total of 25% of what's owed. Since the failure to pay penalty is so much smaller that the failure to file penalty, always try to file all your tax returns on a timely basis, even if you're unable to pay the full amount of the taxes due at that time.
February, 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.
copyright - 2003 - The MDTAXES Network
Tax and financial planning calendar for April, 2003
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