I am, and continue to be, in deep doo-doo with with IRS and I’ve gained some knowledge over the last 6 years that I would like to share, just in time for tax filing season…or as soon people think of it “filing a tax extension” season.
This is not tax advice and should not be taken as so but let’s play a little game I like to call Point-Counterpoint.
What “Tax Extension” Really Means
- Point: Tax extensions are easy and gives you an extra 6 months to file. The tax filing extension form is available online and easy to complete.
- Counterpoint: That is true but there is a catch to filing a tax extension. And it’s a big one. Filing an tax extension extends the time to file your return NOT the time to pay your tax. “Form 4868 doesn’t extend the time to pay taxes. If you don’t pay the amount due by the regular due date, you’ll owe interest.” That’s a direct quote from page 1 of the tax filing extension form.
To Penalize or Not To Penalize: That is the Question
- Point: Sure, I might have to pay interest but I won’t have to pay a late filing fee.
- Counterpoint: Well, maybe. Maybe not. The fine print on the form states “the late payment penalty won’t be charged if you can show reasonable cause for not paying on time.”
So, technically you need to attach a statement to your return fully explaining the reason.
NOTE: If you don’t file an extension, and file late, the form states “the late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by April 18, 2017. It is charged for each month or part of a month the tax is unpaid.” Now, I’m not a math expert but interest compounded monthly sounds scary.
Paying Upfront is Mandatory
- Point: They grant extensions to everyone and no one give “reasonable cause.”
- Counterpoint: Perhaps that’s the case. I don’t know for sure. They do build in a loop-hole…kind of. Form 4868 reads “You’re considered to have reasonable cause for the period covered by this automatic extension if both of the following requirements have been met. 1. At least 90% of the total tax on your 2016 return is paid on or before the regular due date of your return through withholding, estimated tax payments, or payments made with Form 4868. 2. The remaining balance is paid with your return.”
So, apparently, it’s cool with them to hand in your paperwork late as long as you pay them 90% of your amount due upfront. And I’m pretty sure very few do that.
The Cost of Procrastination
- Point: I’d rather pay the interest on the 6 months. The interest rate is low.
- Counterpoint: On the inevitability of interest, they are pretty clear. “You’ll owe interest on any tax not paid by the regular due date of your return. The interest runs until you pay the tax. Even if you had a good reason for not paying on time, you will still owe interest.”
But what is strategically missing from Form 4868 is the interest rate you will be charged or how it will be charged. From my monthly installment agreement from the IRS, I can shed a bit of light on this. Interest is calculated from the original due date for filing (the April 15). Interest is charged against the tax due, plus interest accrued, plus penalties imposed. In short, interest is accruing on the whole kit and caboodle.
The “interest rates are variable and may change quarterly”, they say. Per my table on my statement, the current interest rate is 4%. (Even this form doesn’t mention how frequently it is calculated but my bet is on monthly.)
The Dangers of Setting Precedence
- Point: I file for extensions all the time. It’s no big deal.
- Counterpoint: Beyond the possible penalties and the certain interest, filing extensions may impact any installment agreement (fancy term for payment arrangement) you have in place or wish to apply for. One condition of my current installment agreement is that I file on time. That means no extensions.
A Cautionary Tale
Here’s an accounting of my current balances due to the IRS. I’m sharing this to enlighten you to the fact that maybe something little, like missing a tax deadline or filing late or not adhering to their rules, can really do some financial damage in the long run.
- 2011: Total due $18957, 22% are penalties and interest
- 2012: Total due $5503, 30% are penalties and interest
- 2013: Total due $8208, 15% are penalties and interest
- 2014: Total due $5633, 15% are penalties and interest
The current total for my penalties and interest charges, nearly $8,000. That’s my cost for not filing and for procrastination. Not good. And completely avoidable.