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Filed an Extension?  What to Do Now. 


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7/31/2018
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Filed an Extension?  What to Do Now. 

  1. Go See Your Accountant – Avoid the Pesky Penalties

 

Pesky Penalty #1 – Failure to Pay

An extension to file does not extend your time to pay.  This is one of the biggest misnomers that causes people to generate an unexpected tax bill for penalties and interest.  The IRS charges a failure-to-pay penalty of .5% of the total amount of tax owed for every month the balance is outstanding, capping out at 25%!  To avoid the penalty, you must have paid at least 90% of the tax that eventually turned out to be due when you filed our return during the regular filing period.

Pesky Penalty #2 – Failure to File

If you think you are the only person that is on extension with your accountant, guess again.  That means your accountant is going to be very busy starting around September 1st getting all those returns prepared.  And here we are in August.  Think you should go see your accountant next chance you get?  Good idea.

But, what if you procrastinate and blow the deadline?  Well, you will get hit with a failure-to-file penalty.  This is a harsher penalty that starts pyramiding at 5% per month and maxing out at 25% after 5 months.  You do, however, get to offset a whopping 2.5% of the failure-to-pay penalty for signing up for this behemoth.

Thus, drum roll please… the cost of procrastination is… 47.5% of the base tax due, before interest accrues.  And you thought hard money lenders were tough.

Some Quick Penalty Math

So, let’s say you have a $10,000 tax bill.  You didn’t pay in April.  You extended.  You blow the October deadline because you are busy with end-of-year deadlines, and the holidays sneak up on you.  Predictably, as tax time rolls around for the following April and another tax return is coming due, you get the bright idea of getting caught up on your taxes.  What will all this cost you?

Well, you are going to get hit with the following:

  • Failure to File Penalty = $2,500
  • Failure to Pay Penalty (12 mos * .5% = 6%) = $600
  • Accrued Interest (*effective rate of 6.2% using AFR) = $628.03
  • Grand Total = $13,478.03

But, how much did the procrastination really cost you in real dollars and proportionally:

  • Penalties/Interest You Could Have Avoided = $3,478.03
  • Effective Annualized Cost of P&I for 1 Year = 34.9%
  1. Plan Ahead If You Owe Tax, Penalties and Interest

Owing the IRS is like taking a taxi ride—not an Uber—but a traditional metered taxi.  The longer the trip, the longer the tab keeps on running.  If you are going to owe interest and penalties at rates of potentially anywhere between 25% and 35%, you should factor that into how much money you have set aside to pay your taxes come October and now is the time to look at where you can pull some money from to make that happen.

  1. Fix Any Gaps in What You Provided Your Accountant

Does your accountant have all your W-2, 1099, and other supporting documentation?  Did you tell them about your bonus at work?  Did you provide 1095-A, 1095-B or 1095-C demonstrating Minimum Essential Coverage (“MEC”)?  Did you provide a copy of your 401(k), IRA or brokerage account statement?  What about any K-1s?

Go through what happened economically over the past year and make sure your accountant has what he needs to complete your returns.

https://www.fool.com/retirement/2018/07/28/filed-a-tax-extension-3-mistakes-to-avoid.aspx



Category: Tax Law


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