As the April 15 filing deadline for your 2008 Form 1040 approaches, what can you, as a Taxpayer, do to minimize the IRS penalty parade? What penalty parade, you may ask. Well, there are several penalties that may apply. If you haven’t paid enough in estimated tax for 2008, you could owe the 5% estimated tax penalty for underpaying your estimated tax.
Well you might think, I’ll just file an automatic filing extension with Form 4868. This will give you until October 15th to file your 2008 return. But did you know that you just because you filed an extension for filing does not give you an extension to pay? If you pay what you owe on October 15th, you will owe the 1/2% per month penalty for paying late plus the 5% interest (per annum) for paying late. So this could add another 6 1/2% to the amount due on April 15th. If you wait until after October 15th, the 1/2% per month penalty will continue to accrue until it maxes out at 25%.
You can decrease the 1/2% per month late payment penalty by requesting an installment agreement. Many taxpayers do not know that if they are current in their tax payment and tax filing requirements, they can request a streamline installment agreement if the amount of tax owed is under $25,000. Taxpayers can take up to sixty (60) months to pay. An installment agreement will reduce the late payment penalty by 50%.
Taxpayers can use Form 9465 to request an installment agreement. You will be required to provide the year, the form number, the amount you wish to pay, plus the day that you want your payment to be due. You will also have to provide other basic information such as your name, address, social security number and place of employment. The form can be attached to your 1040 if you file by the 15th of April or the 15th of October if you have filed for an automatic extension. A reduced late payment penalty and interest will continue to accrue.
And don’t even think about not filing an extension just because you think you don’t owe any tax or you think you are due a refund or you believe your business expenses equal or exceed your business income. You could be liable for the late filing penalty which is also calculated on a a percentage of the amount of tax owed. That penalty amounts to 5% per month for each month that a return is filed late up to a maximum penalty of 25% of the original amount of tax owed. I have seen many a case in which individuals, especially self-employed individuals filed late thinking they were due a refund only to learn that their late-filed return was being audited. The IRS then imposed the late filing penalty and the late payment penalty plus interest on those penalties.
The IRS will also permit for the late payment and late filing penalties to be eliminated or abated or reduced if the Taxpayer meets what are referred to as “reasonable cause” criteria. A reduction in the penalty will also result in the elimination the interest on those penalties.
The best things for you as a Taxpayer to do at this point if you haven’t filed your return are to file an extension request with Form 4868, estimate the amount of tax you will owe based on your earnings and withholding, and pay the balance due with your 4868 extension request if you can do so. That way, the payment will cut off any additional interest and penalties that the IRS may impose.
As the April 15 filing deadline for your 2008 Form 1040 approaches, what can you, as a Taxpayer, do to minimize the IRS penalty parade? What penalty parade, you may ask. Well, there are several penalties that may apply. If you haven’t paid enough in estimated tax for 2008, you could owe the 5% estimated tax penalty for underpaying your estimated tax. (more…)
