Thursday, February 19, 2015

What to do if you can’t pay your taxes

Bill Bischoff for US News Report writes:  As the filing deadline for last year’s 1040 looms ominously, you have two rational choices: Ship your 2014 return off by April 15 or get a filing extension by that date. This advice holds true even if you know you don’t owe any taxes — more so if you do but realize you can’t pay up on time. 

‘But I know I don’t owe’
Let’s say you are certain there are no additional federal income taxes due for last year. Maybe you had negative taxable income or coughed up your share via withholding or estimated payments. Now you are missing some records; are too darned busy at work; or have some other convincing (to you) reason for putting off filing. And you don’t want to bother with getting an extension either. No problem, since you don’t owe — right? Wrong. 

While it’s true there will be no IRS interest or penalties (these are based on your unpaid liability, which you say is zero), blowing off filing or extending is still a bad idea. Here’s why. 

  • You may be due a refund. Filing a return gets your money back. No return, no refund.
  • Until a return is filed, the three-year statute-of-limitations period for the commencement of an IRS audit never gets started. The IRS could then audit your 2014 tax situation five years (or more) from now and hit you with a tax bill plus interest and penalties. By then, you may not be able to prove you actually owed nothing. In contrast, when you do the smart thing and file a 2014 return showing zero tax due, the government must generally begin any audit within three years. Once the three-year window closes, your 2014 tax year is generally water under the bridge, even if the return had some warts. (We hope that was enough mixed metaphors for you.)
  • If you had a tax loss in 2014, you may be able to carry it back as far as your 2012 tax year and claim refunds of taxes paid in 2012 and/or 2013. However, until you file a 2014 return, your tax loss doesn’t officially exist, and no refund claims are possible.
  • There are other more esoteric reasons that apply to taxpayers in specific situations.
The bottom line is, you need to either file by April 15 or, perhaps more realistically, get an extension and file later when you have more time.
The IRS will automatically approve any request for a six-month filing extension to Oct. 15. Simply file Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) by April 15. Completing it takes about two minutes. (Honestly.)
You don’t need to have a reason for asking for the extension, and signatures are not required. For example, if your spouse is vacationing in Greece or unavailable to sign for any reason, that’s no problem. The only requirement is the total 2014 income tax liability and any amount still owing (which could be zero) must be estimated with reasonable accuracy on Form 4868. 

‘I owe but don’t have the dough’ 
This is absolutely no excuse for not filing or failing to get an extension. Here’s why.
  • If you file by April 15 but can’t pay, you should arrange for an installment agreement, as explained below.
  • If you are not ready to file, just send in Form 4868 on or before the magic date.
Either way, you’ll successfully dodge the expensive (and totally unnecessary) 5% per month “failure-to-file” penalty — even though you didn’t pay on time. The only cost for taking this action is an IRS interest charge at a relatively reasonable rate (currently 0.75% per month, which amounts to a 9% annual rate) until you pay up. (The interest rate can change quarterly, so it may be higher or lower by the time you read this.) SNIP, the article continues @ US News Report, click here to continue reading....