Late Tax Returns and What You Need to Know
Written by admin on April 9th, 2011This article discusses the consequences of late tax returns to individuals; what you should do and what you should consider to get back on track. The article is written for the layperson — it is not intended to be technical in nature, nor discuss all the aspects of tax planning one should consider. It addresses the federal income tax consequences and does not specifically address state tax consequences that are very similar.
What are the penalties?
There are a host of penalties that may be due with your tax returns. However, there are essentially two main penalties to deal with; the late filing penalty and the late payment penalty. The late filing penalty subjects you to a penalty roughly equal to five percent (5%) of the balance due. The late payment penalty subjects you to a penalty of an additional one percent (1%) on top of other penalties you may owe. There are, however, certain additional rules that apply that could increase these amounts ever further.
What about interest?
If the penalties weren’t enough, the IRS will assess interest on the amounts you owe inclusive of penalties. The interest rate varies, but approximates around five percent (5%). Don’t use the IRS to finance what you owe — you have credit cards for this. Get yourself off the IRS radar as quickly as possible.
What if I file an extension?
Unfortunately, in most circumstances, you can’t get another extension of time to file. If your return is late and the filing of your return has been extended, the penalties will be calculated retroactively as if your extension was never filed. What if I don’t owe any taxes? The good news is that if you don’t owe any income taxes, there are no late filing or late payment penalties calculated on your return. You generally have three (3) years to file your returns and claim your refund. However, its always recommended to file your return as quickly as possible to shorten the time period that the IRS can examine or change what you’ve reported.
What if I owe taxes and can’t pay?
Even if you owe taxes and can’t pay, it is almost always in your best interests to file your tax return as soon as possible. Even though the late payment penalty will continue to run, filing your income tax return timely can stop the late filing penalty from being assessed. Also to be considered, is the length of time in which the IRS can challenge your tax return. Generally, the IRS has a three (3) year period in which to examine or change what you’ve reported. If you don’t file, this period never starts.
What if I owe taxes and never file?
If you owe taxes and never file, the chances are pretty good the IRS will still assess you the taxes you owe. This is because the IRS files a tax return for you (also known as substitute for return). You may ask “why should you prepare a tax return if the IRS files one for you?” This is simple — when the IRS files a return for you they will generally only take into consideration the income you earned and not the tax deductions you are entitled to. So if you want to pay a whole lot more, let the IRS file it for you!
What should I do?
Hire a professional tax preparer. The benefits of hiring a professional to do your taxes almost always outweigh the costs. Experienced, certified public accountants are trained to review your return and look for both missing income and expense items you may have overlooked. They can do it ten times faster than it will take you and it will be right the first time! They are required to remain current with tax law and can not only help you with your delinquent or late tax returns, but help you plan for your 2009 taxes to save loads!
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