The Terrible Twos: Avoiding Common IRS Tax Penalties
Failure to file means just that – you did not file your tax return by the date that it was due. This is typically April 15th of the current year for the tax year ending on December 31st of the previous year. In short, the 2010 tax year ended on December 31, 2010. You have until April 18, 2011, to file this tax return timely. The deviation from the 15th due date is a result of a District of Columbia holiday.
“What about an extension, “you ask? Yes, it is true that you can file IRS Form 4868 to obtain an automatic six-month extension; however, be aware that simply filing this extension does not ensure that it will be honored. The IRS may void/invalidate your extension request for some of the following reasons:
• You had reason to believe that you would owe IRS taxes on the return in question.
• You made no effort to make estimated tax payments, or have sufficient tax withheld from your paycheck, even when you had reason to believe that you would owe IRS taxes on the return in question.
• You listed a zero as your tentative liability on your extension request form. This would be an erroneous action when you knew that you in fact would owe IRS taxes.
Although an invalidation of an automatic extension to file will typically occur during the course of an examination, rather than otherwise, why take this risk?
THE TERRIBLE TWOS: FAILURE TO FILE AND FAILURE TO PAY PENALTIES:
The failure to file (FTF) penalty can be avoided by filing your tax return on time, including any valid extensions. Do this even if you are unable to pay the entire balance due. Obtaining an extension to file the tax return will not negate a failure to pay (FTP) penalty. The failure to pay (FTP) penalty will be assessed unless you do all of the following:
• File a valid extension request indicating your balance due. This automatic extension provides an extra six months to come up with the money.
• Pay at least 90% of the balance due by the original due date of the tax return. For most taxpayers this will be April 15th.
• Actually file the tax return by the extension due date, and...
• Pay the remaining 10% balance on or before the extended due date.
If you have failed to file your return or pay your IRS taxes timely, you still may be eligible for penalty abatement. Approval is not guaranteed, and you will need to show good cause that your failure to file or pay your tax was not a result of willful neglect.
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