As another tax season begins many taxpayers will end up owing taxes when filing their income tax returns. This is not an issue when the taxpayer has money to pay the tax balance due. However, when the taxpayer does not have the funds necessary to pay tax due some individuals would rather not file or file a tax return extension.
In the event, a taxpayer has a balance due on their tax return and currently unable to pay. The taxpayer should file the tax return without making a payment for the amount due. Doing this will avoid a late filing penalty.
What is the Penalty for Failing to File a Tax Return by the Due Date?
Under §6651 of the Internal Revenue Code a penalty is imposed for failure to file a tax return. This penalty is 5% of the tax return balance due; and 5% for each additional month the tax return is not filed but not to exceed 25% in the aggregate. Therefore it is more important for a taxpayer expecting to owe to timely file than a taxpayer expecting a refund because the taxpayer receiving a refund will not be subject to a failure to file penalty.
An Extension of Time to File is Not an Extension of Time to Pay!
Extensions are needed when information necessary to file a complete and accurate tax return is not available until after the filing deadline. This is very common for taxpayers who are partners and shareholders in flow-thru entities who receive their K-1 after April 15th.
Taxpayers will need to estimate the amount of tax that will be owed with tax return. This amount should be paid with extension (i.e. an extension payment). If the taxpayer underestimates this amount the taxpayer may be subject to a failure to pay proper estimated tax penalty (IRC §6654).
Beware of Trap! Remember, an extension is an extension of time to file the tax return, not to pay. Therefore taxpayers need to estimate the amount of tax that will be owed and submit payment with the extension. IRS Trap → the IRS can VOID your extension! If the IRS determines the estimate was not reasonable the extension will be voided (as if the extension was never filed). If this happens the taxpayer will be subject to a failure to file penalty.
The Solution = File Tax Return and Apply for an Installment Agreement.
After filing an income tax return with a balance due (and without payment), the taxpayer will receive a bill from the IRS for the tax due plus any interest or penalty. The taxpayer may now enter into a payment plan called an installment agreement to pay the outstanding tax balance.
If you have any income tax questions or need to speak with a Long Island Tax Attorney feel free to contact us at (212) 520-2906.
Peter E. Alizio is a CPA, Tax Attorney, and owner of Alizio Law, PLLC. When he is not solving IRS and NYS tax problems he likes watching football and playing amateur chef. He also enjoys meeting new people, preferably over coffee, whiskey or cigars.