Practical Last Minute Tax Tips

TODAY IS APRIL 15TH.

If you owe taxes and you plan to eventually pay the tax you should file your return on time. A late return with taxes owed is assessed immediately for late filing/late payment penalties of 5% per month on the unpaid balance up to a maximum penalty of about 47.5% of the original tax due. Many states also impose penalties as harsh as this.

If you file your return on time but don’t pay (or pay some of the tax due but not all of it), the late payment penalties are only about half a percent per month on the balance due. Interest is always charged and the rates vary from year to year, but are generally less than credit card interest rates (typically 8% to 11%). Unless your have an exceptionally low interest rate on your credit card coupled with a low cash advance fee it is generally cost effective to make payment arrangements with IRS.

RETIREMENT PLAN FUNDING

Today is the drop-dead cutoff for funding any IRA for 2004. You can kick the funding date out a few months for Keough, SEP, and other kinds of retirement plans by filing a valid extension by today. This will be true for sole-proprietors, calendar year partnerships or LLC’s, and corporations with a January 31, 2005 year end.

TAXES DUE VS ESTIMATED TAX PAYMENTS DUE

Many of you are faced with a common dilemma. You owe tax for 2004 and you have an estimated income tax payment due for 2005 on April 15 BUT you don’t have enough money for both. The answer to this question is to pay the taxes due for 2004 first (and before the deadline) either with the return or with an extension.

AN EXTENSION IS NOT AN EXTENSION OF TIME TO PAY THE TAX DUE

The only reason to file an extension when you owe tax that you can’t pay is to keep the IRS off your neck for four to six months. But it is a costly breathing space.

If you have taxes due (or an extension with a payment) you better make sure it is sent certified with a return receipt request.

THIS IS CRITICAL WHEN YOU OWE TAX

Be sure that you ask the post office clerk to hand cancel each envelope and your receipt while you wait. Do not rely on the post office to do anything right. Don’t accept any clerk’s instructions to “just put it in the bin over there for the tax returns”. Over the years many people have been burned that way.

You must send the returns using certified mail (or FedEx, UPS, etc. in the case of the feds) and you must get a return receipt.

USING FEDEX OR UPS TO DELIVER YOUR EXTENSION OR RETURN

Do not send your return to a post office box if you are using FedEx or UPS or another private delivery service to deliver your return or extension.

You must use a street address or the Service Center address. Good luck finding out what those addresses are.

DON’T RUSH TO THE POST OFFICE ON APRIL 15TH IF YOU HAVE A REFUND COMING.

Simply mail your returns from the office, home, or drop them in a mailbox—even if it is a day or two after the 15th.

If you don’t owe any federal tax it doesn’t matter whether you file a return on time or not because penalties are based on the amount of tax owed.

No balance due means no penalty due for being a few days late in filing. Better yet, send off an extension just to cover yourself.

DISCLAIMER

We don’t advocate filing returns late and certain states may penalize you for late filing even if you have a refund coming back. California does not but gets real nasty if you wait until after October 15 to file your return (California presumes an automatic six-month extension exists when taxpayers owe no tax. This is a true ‘paperless’ extension).

The IRS still requires that you file a formal extension. Many states do not, asking only that a voucher and a payment be filed by April 15th when taxes are owed.

Our clients that have ignored the impending April 15th deadline can count on one thing. Even if you haven’t gotten in touch with us, we filed or will file an extension for you anyway. For free. Let’s hope you don’t owe any money.

PAY YOUR TAXES WITH A CREDIT CARD You may pay your taxes, interest, and penalties by credit card for paper and electronic filed returns.

Please click on the link “Pay Income Tax By Credit Card” to the right.

There is a significant charge for using the service. The fee is not a government fee. It may well be cheaper to take a cash advance on a credit card.

AFTER YOU FILE (CHECK YOUR REFUND)

Please refer to the links to the IRS website and to many state websites (on the sidebar to the right) where you can check the status of your individual tax refund.