Even If Refund Due, Filing Tax on Time Pays
Every year at tax time, the IRS is asked whether those taxpayers who expect refunds must be as careful of the April 15 filing deadline as those who owe money, and the people inquiring are told that “generally, you’re not going to get a penalty,” says Rod Young, IRS spokesman at Washington headquarters. “We don’t care when you file,” says Rob Giannangeli in the Los Angeles district office, “as long as it’s within 3 years of the due date, or you lose your refund.”
Somehow it’s just not convincing. Every year “we go over it again, and the same answer holds true,” says Young, but people still hear warnings that they face late penalties even if they expect refunds. Anyone who passes on the IRS assurances invites a blizzard of “Are you sure ?” calls. Says one taxpayer: “I just can’t believe that it’s true.”
Tax Court Cases
Certainly as truths go, it’s rather contorted. One must, by law, file by April 15. Those who don’t must pay a late filing penalty, and if they still owed taxes, a late payment penalty as well (plus interest for each day late). But there’s a semantic loophole for those due refunds: The late filing penalty is 5% per month “of the tax not paid,” and someone expecting a refund has no tax unpaid. “If there’s no net due,” says Giannangeli, “there is no punishment.”
One nevertheless hears of tax court cases that go against such taxpayers and of people who swear they’ve had penalties deducted from their refunds. There’s also a lot of plain disbelief: “People think that some type of penalty must apply,” says Young.
People may be right. Certainly they’d be right to ignore the IRS’s blanket assurances, given the risks--starting with the possibility that they’ve made a mistake. “You don’t really know you’re due a refund until you’ve filled in the whole form,” says Los Angeles accountant Michael Sedgwick. At which point, why not mail it in?
They could also run up against state rules, which generally follow the federal, requiring “timely” filing but applying penalties only against a taxes owed. Some claim, like the IRS, to give taxpayers three years before applying the only punishment--cancellation of the refund.
But some point out that a lateness could in time--period unspecified--”turn into a failure-to-file situation,” says Oregon Revenue Department spokesman Patricia Dunn, which calls forth inquiries, notices, assessments based solely on known income, and perhaps penalties and interest. At some point--equally undefined--a substantial lateness could also risk “criminal prosecution for not filing,” says Illinois Revenue Department spokesperson Helan Adorjan.
The process can get even more complicated and unpredictable. California’s Franchise Tax Board, for example, “decided not to assess penalties on those due refunds,” says Board
Similar Complications
But one can’t count on it. The taxpayer does risk some penalty if the board sends him a letter, usually in November, asking why he didn’t file. If he doesn’t respond in 10 days, he could get a “demand” penalty (25% of his total year’s tax) as opposed to a “delinquent” penalty (5% a month, applicable only on money owed). But one can’t count on a 10-day leeway, or even a November mailing: The board could as easily send such notices in September or July and give the taxpayer only 8 or 9 days.
There are similar complications with the IRS--none of them revealed until one spends a week pressing hard for qualifications and codicils. It turns out, for example, that if anyone files late, the IRS has 90 days to get the refund out instead of the usual 45. Worse, it turns out that there’s a range of penalties the IRS can apply--beyond the late filing penalty.
The lateness could, for example, qualify as “negligence” or “intentional disregard of rules and regulations” and be subject to a negligence penalty of 5% of the entire year’s tax. Such a penalty, says Young, applies to situations where “the taxpayer should have known better but didn’t.” Unfortunately, that may be the best definition of “negligence” available. As one recent IRS memorandum says: “Neither the Code nor the regulations define the terms ‘negligence’ or ‘intentional disregard’. . . . Therefore, such a determination can only be made by the appropriate field office.”
They might also call it a crime: “There have been times we’ve prosecuted people for failing to file even though they deserve a refund,” says Giannangeli, “because there was evidence they were trying to defraud the government.” They may not, for example, have known they were due a refund and were simply trying to evade taxes. And if such a crime is involved, there could be penalties of $25,000 or a year in prison.
But these are heavy judgments--negligence and fraud--and one would think the ordinary schnook who simply missed the April 15 deadline is still, as promised, safe from penalty, right? Wrong. Several clients of H & R Block got such negligence penalties last year, “and they were simple late filings with refunds--a month late, maybe 6 weeks,” says Judy Keisling, manager of tax training at H & R Block’s headquarters in Kansas City. “It was taken out of their refunds. At what point does it become negligence versus lateness?”
“For years, we told folks that if they were expecting a refund, don’t worry,” says Keisling. Now her department has sent out a bulletin suggesting that people expecting refunds file for extensions like everyone else if they plan to be late.
In general, one should probably file whatever is required by the IRS, whenever it’s required, however rosy one’s purported chances of escaping punishment. “If the taxpayer ever gets into a dispute with the IRS, for whatever reason,” says Sedgwick, “when it’s all over, if you’ve behaved in a totally professional manner, following the rules to the letter of the law, the net result will be better.”
