How to Avoid Some Pitfalls in Tax Filing
Who doesn’t have some gut fear of the Internal Revenue Service and its certain retribution? Who isn’t a little anxious that come April 15, they’ll be doing something wrong or--heaven forbid--not “timely,” as the IRS requires?
From the anxiety and the fear come several questions commonly asked or points persistently misunderstood about the procedures for filing individual taxes. To wit:
- Filing deadline: The deadline for mailing in forms 1040, 1040A and 1040EZ is midnight April 15; the quandary is how to prove one’s forms were sent on time if they are somehow lost by the Postal Service or the IRS. The usual safeguard is certified mail, but the IRS--which is slowed by the manual handling thus required--says certification only proves the taxpayer mailed an envelope, with God knows what inside.
Nothing is foolproof. One might trust in postmarks: The IRS keeps the envelopes of all packets that arrive after the deadline (little comfort if it doesn’t arrive or having arrived, is misplaced). Someone who had tax due might also get back a canceled check (checks are separated from forms and deposited within 24 hours). More nervous people might submit their forms at an IRS walk-in office (found in most larger cities) and have a clerk stamp their copy.
If the taxpayer expects a refund, the IRS doesn’t care when he files: He has already paid in more than he owes. But if he doesn’t file within three years from the original due date, he forfeits his refund.
- Penalties: If he owes money, a late filer will have to pay a penalty, if not several. There’s annual interest of 9% compounded daily for the time the payment was late, a late filing penalty of 5% for each month or part of a month late and maybe a late payment penalty of half a percentage point per month as well. (Is that all clear?)
The whole penalty structure is much feared, ubiquitous and barely comprehensible. Indeed, under the IRS code’s pay-as-you-go system, the taxpayer should pay taxes year-round through withholding or quarterly estimated tax payments, and must have paid 90% of his year’s total by the April 15 filing. If the final amount due is more than $500 and more than 10% of the year’s total owed, there’s an underpayment penalty of 9% a year applied to each quarter that was underpaid.
- Refunds: Almost 75% of taxpayers file for refunds, perhaps, says IRS spokesman Rob Giannangeli in the Los Angeles district office, “because they treat it as a forced savings program.” They may even earn interest: IRS refund checks must go out within 45 days of the date of filing or the due date, whichever is later, or the IRS pays interest of 8% a year. (In fiscal 1985, after the IRS installed new snafu-laden computers in all its centers, late refunds cost it more than $44 million in interest, 60% more than the previous year.
- Extensions on the filing deadline are fairly common: 4% of taxpayers get them. The first is automatic: The taxpayer simply files a Form 4868 to get four months more, attaching a copy when he files his 1040 in August. An additional two-month extension requires another form (2688), a good reason and an affirmative response from the IRS. A “good reason” might be that records were unavailable, destroyed by fire or some other casualty. An inadequate reason would be: “My accountant was too busy.”
The extension is on the filing, however, not the tax payment, which must be estimated and sent with the original request for an extension. If it’s within 10% of the figure ultimately filed, and if the remaining amount owed is sent with the 1040, the taxpayer pays only interest on the arrears. Otherwise, there’s a late payment penalty of half a percentage point a month, plus a late filing penalty (5% a month) just for underestimating the taxes in April, thereby “invalidating” the extension.
Amendments: Taxpayers can also amend tax returns at any time within three years after the due date, usually because they forgot a deduction or omitted some income. If as a result they owe more tax, and voluntarily point it out before the IRS does, they pay 9% interest on it but no penalties. If the IRS owes them more, the service pays interest of 8%. Some years, that’s a good investment, given the going rates on savings, and people have been known to save some deductions for later amendments, so they can get refunds with interest.
- Tax preparers can offer only knowledge of the IRS code, not influence with the IRS--undoubtedly a disappointment to some of the 45% of taxpayers who use tax preparers (almost 60% in California). The preparer is not without responsibility: The IRS does assess some preparer penalties--for not signing returns and other procedural malfeasance, or for knowingly understating a client’s income or overstating deductions. But generally, the preparer relies on the information and figures of the taxpayer, who suffers the penalty alone if they’re falsified.
- Record-keeping: For any possible IRS inquiry or audit, the taxpayer should save all records for the statutory limit of three years (from due date). One might keep forever--and not just for the IRS--any records that might have bearing on the future, usually involving long-term acquisitions such as cars, stock and real estate. Everything else can go, unless one has committed some criminal fraud, such as willfully hiding $100,000 of income: There’s no statute of limitation on investigating that.
- The most common errors are the most humble: forgetting to sign returns, forgetting to attach W-2 forms and making simple math mistakes (particularly picking up the wrong figure from the tax table). Then there are always people who send the state form to the IRS and the federal form to the state. And if one of these mistakes “invalidates” the return or makes it late, there could, once again, be penalties.
