Being caught off guard or surprised by a “balance due” is the sharp pain that everyone wishes to avoid.
Your U.S. Individual Income Tax return (Form 1040) is normally due to be filed by April 15th of any given year, following the close of the previous calendar year (December 31st). Generally speaking, those states that impose an income tax, follow the same schedule. You hear and read lots of stories of taxpayers filing early in late January or early February to receive their gigantic refunds. Oh happy days.
What about those taxpayers who find themselves in a different position? Those that owe money either to the Internal Revenue Service or their respective state(s)? Sometimes the “balance due” return(s) have been planned in advance. You, the employee may have had your withholding stopped or reduced in order to fund the down payment on a home, pay off debt, etc. If this is the case, you knew the tax bill(s) was coming, so while the pain of oweing still hurts, hopefully it is dulled a bit.
Being caught off guard or surprised by a “balance due” is the sharp pain that everyone wishes to avoid.
You may have filled out your Form W-4 (Employee’s Withholding Allowance Certificate) incorrectly, had income that you were unaware was taxable or expenses that you thought would reduce your income tax burden but unfortunately do not. Yikes.
Let us assume for this discussion that you currently do not have the money to pay.
What is a taxpayer to do? Do you wait for the prospect of future cash flow to come to fruition to file your returns and pay off what you think is due? Do you simply not file? After all, it will take those pesky taxing authorities time to reconcile all the forms that were sent to them electronically, whether income or deductions, to you, the taxpayer who holds a unique social security number, that which the information was reported under.
The answer is simple. File your return timely, before April 15th. Do not put it on extension until October 15th. The Internal Revenue Service under Internal Revenue Code (IRC) Section 6651 can and will assess “additions to tax” which we commonly refer to as penalties. The failure to file penalty and failure to pay penalty along with interest can quickly amount to more than 50% of the tax balance due. Pay what you can against any balance that remains due, but please file. An extension filed to delay the payment of taxes due will not stop the failure to file penalty.
You can certainly argue that you had a “reasonable cause” not to timely file and pay while the Internal Revenue Service will argue “willful neglect” when they catch up with you. It is such a simple rule to comply with. File timely. Almost equally important to filing your return timely is staying current with your tax obligations. Let the sins of the past be what they may. You need to show that you are back on track and not pyramiding your tax balances year after year, thereby portraying to the Internal Revenue Service good will and intent to comply with your current and future tax obligations.
While it is definitely better to find some funding source to pay the Internal Revenue Service any balance that remains due, several options of payment (and nonpayment) are available with them. A short term installment agreement with not much paperwork needed, longer term arrangements that require financial information including disclosure of assets, being placed in a currently non collectible status, etc.
As each option increases the need to supply more complex and specific data to the Internal Revenue Service, so too does the need to have a competent Certified Public Accountant on your side.
At a minimum, by timely filing your “balance due” Individual Income Tax return with the Internal Revenue Service, you avoid the failure to file penalty calculated at 5% per month or fraction of month filed late up to 25% of the tax due. In my experience it is much easier to negotiate either an abatement or reduction of other penalties with the Internal Revenue Service if you file on time.
Gilbert Garczynski CPA, trail runner, mystery novel lover, volunteer caretaker of rescued horses.
