CARL WATTS & ASSOCIATES

October 29, 2012

www.carlwatts.com
office@carlwatts.com
Washington DC
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Late Payments & Late Filing
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So, the results can be cumulative and significant. However, the IRS sets a 25% maximum on interest on unpaid taxes, penalties and corresponding interest assessments.

People who repeatedly don't comply with the law are subject to additional enforcement measures.

If you don’t file your due tax returns, the IRS will file a substitute return for you, which will not include any additional exemptions or expenses you may be entitled to and may overstate your real tax liability. Once the tax is assessed the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal tax lien against your property.

If you pay estimated taxes, you should be aware that there are penalties for late payment or underpayment of estimated taxes also, as we detailed in another of our newsletters.

If you are unable to pay all taxes due on the bill, you are encouraged to pay as much as possible. By paying as much as possible, the amount of interest and penalties owed will be lessened. Based on the circumstances, you could qualify for an extension of time to pay, an Installment Agreement, temporary delay, or Offer in Compromise. For more details on payment plans, please see one of our previous newsletter.

Although the fail-to-file penalty is also known as the delinquency penalty, the IRS doesn’t easily recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

Also worth mentioning is that the IRS understands that certain circumstances can apply that prevent timely payment of taxes.

Generally, the IRS will remove penalties for taxpayers who have a history of compliance (taxpayers who have a history of filing their returns and paying their taxes on time). In addition, the IRS will make allowances for taxpayers who can show that they had a reasonable cause for not adhering to the IRS guideline for which they were penalized. Examples of reasonable cause include, but are not limited to, incarceration, illness, overseas travel and military service. Abatements generally are not approved until the tax owed is paid in full.

In such a case, you would have to complete IRS Form 843, Claim for Refund and Request for Abatement, to request that the penalties added to your account be waived.

Complete IRS Form 2210 if you are requesting a penalty removal that resulted from an underpayment of estimated tax. Check box A to request a waiver of the entire penalty or check box B to request a partial abatement.

The IRS provides all taxpayers with the opportunity to discuss hardship circumstances and to negotiate payment arrangements or to submit what is referred to as an “Offer In Compromise” on delinquent tax payments.

It is best to consult with a tax attorney or to fully explore IRS policies and procedures to apply for abatement, negotiate tax payments or submit an Offer In Compromise.

You all know that late payment and late filing of your tax returns is going to cost you, but how much, why and under what circumstances does that happen?

If you are due a refund for withholding or estimated taxes paid, it must be claimed within three years of the return due date or you risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

If you are self-employed and do not file a return, you will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

If you have a refund, there is no penalty for filing late. The IRS generally pays interest on refunds that have been delayed because of slow processing by the IRS. Since most late tax returns take longer to process, the IRS "may" pay you interest based on the extra amount of time it takes them to process your return.

If you have a balance due on a late tax return, the IRS will calculate additional penalties and interest. There are three separate penalties:

- Failure to File Penalty;

- Failure to Pay Penalty;

- Interest


The failure-to-file penalty (also known as the delinquency penalty) runs at the rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you file an extension for your filing due date, you are not filing late unless you miss the extended due date.

The failure-to-file penalty is based on the amount required to be shown on the return, and not just the amount shown as due.

Additionally, if you are more than 60 days late in filing your taxes and owe money to the IRS, they can assess a minimum penalty that can range from $100-$135, or up to 100% of the taxes owed.

The Internal Revenue Code (Section 7502) says that a return is deemed "timely filed" on the date of the postmark on the envelope -or- on the date a receipt is issued by the post office for either certified or registered mail. If the postmark shows that a return was mailed on or before the due date, the return is considered timely filed regardless of when it is received by the IRS. But if the return is filed late (based on the postmark), the return is considered filed when it is actually received by the IRS.

The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late.

The important thing to consider in this incidence is that there is no maximum limit on the amount or continuation of failure-to-pay penalties. The penalty will continue to grow and accrue until the tax debt is totally satisfied.

The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts already paid, e.g., via withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount. In effect, there is no future "risk" with respect to this penalty.

If the 0.5% failure to pay penalty and the failure to file penalty both apply, the failure to file penalty drops to 4.5% per month so the total combined penalty remains at 5%. The maximum combined penalty for the first five months is 25%. Thereafter the failure-to-pay penalty can continue at o.5% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time.

Interest rates are calculated based on the amount of unpaid taxes and penalties assessed. The IRS sets quarterly, variable interest rates for unpaid taxes. Interest is also assessed on penalties.