Failure to File and/or Pay Taxes

Most people know April 15th (April 17th in 2012) is the due date of your individual income tax return.  You may request a six month extension allowing you to file your return by October 15th without penalties.  However, if you fail to request the extension timely or if you don’t file your return by the extension date, you may be subject to late filing penalties.  The penalty is 5% (on the net amount of tax due) for each month not filed up to 25%.  If the return is more than 60 days late, the minimum penalty is the lesser of $135 or tax due.  Interestingly enough, there is no penalty if the return shows a refund.  I suppose this is because the IRS would be happy to keep your money, and the only way you can get it, is to file your return.

We remind our clients that even though the IRS will grant you an extension to file your return, the extension does not allow you more time to pay taxes.  You must pay your taxes on time.  Don’t ignore it because it will only get ugly!  You can set up an installment agreement with the IRS to pay your tax over time.  While it won’t eliminate the fee, they may reduce the rate by 50%. 

The failure to file timely penalty is 5% per month to a maximum of 25%.  The penalty for failure to pay timely is also 5% per month.  However, both penalties do not apply on the same liability.  If you are subject to both penalties in the same month, the failure to file penalty will be reduced by the failure to pay penalty.  (Aren’t they so kind?)  However, the entire time these penalties are running, additional interest is accruing on all tax and penalties owing.

My advice; file your return on time, even if you don’t have the money to pay the tax.  Contact the IRS to set up the installment agreement.  Don’t run from it.  It won’t help the situation.

As always, consult with your tax advisor!

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