Filing Late Tax Return May Be Costly Luxury Under the New Laws

Haven’t filed that dreaded 1040 yet? You’re not alone. About half of the nation’s taxpayers procrastinate until the last two weeks to file their tax returns, the IRS says. Some go even beyond that by filing for extensions--or simply not filing at all.

Unfortunately, if you are thinking about getting an automatic extension by leaving the country, the rules have been tightened considerably this year. And penalties can be stiff if you fail to file or don’t pay all you owe. Also, taxpayers who file late tend to make more mistakes; and if your tax preparer commits the boo-boos, you’re still liable.

Here are answers to some common last-minute questions about filing deadlines, extensions, penalties and common mistakes made by procrastinators:

Question: When do I have to file?

Answer: This year, because April 15 falls on a Saturday, you don’t have to file until midnight, April 17 (that means you have all day Monday, April 17, to file). That is also the deadline for making individual retirement account contributions for 1988, or Keogh contributions for plans you opened by the end of last year.

Q: What if I can’t file on time?

A: You can send in Form 4868 before the April 17 deadline to get an extension until Aug. 15. But you still must estimate your tax liability and enclose a check with the form if you expect to owe more tax.

If you fail to make that payment, you may be subject to a monthly late-filing penalty of 5% of the unpaid balance, up to 25%, plus interest charges currently set at 12%. That is because your extension could be disallowed.

An extension, however, cannot be granted for making your IRA contributions for 1988. But you can extend the deadline for making contributions to an already-opened Keogh plan.

Q: Can I still file late if I don’t expect to owe any money?

A: Sure, but if you don’t file within three years, you could lose any refund to which you are entitled, IRS spokesman Robert Giannangeli says. And if you don’t file and end up owing money, you will be subject to the 5% late-filing penalty, plus interest.

You also could face penalties for not filing certain returns. For example, if you make non-deductible contributions to an IRA, but fail to file Form 8606 to account for such contributions, you are subject to a $50 penalty ($100 if you and your spouse each made non-deductible contributions).

Q: Can I get an automatic extension if I am out of the country on April 17?

A: You used to get an automatic two-month extension on filing, as well as paying, if you were out of the country on the deadline date. No more.

Under new, tougher IRS rules that began this year for 1988 returns, you only can get an automatic extension if your residence and primary place of business both are located outside the United States. Otherwise you must file Form 4868.

“You can no longer just go across the border for lunch” and get an extension, says Julian Block, tax expert with Prentice Hall Information Services and an attorney in Larchmont, N.Y.

Q: What if I owe but don’t have the cash?

A: File anyway and pay what you can afford. You will be assessed a failure-to-pay penalty of 0.5% per month on the unpaid balance, up to a 25% maximum, plus interest. But that is a lot less than the 5% failure to file penalty, plus interest.

If paying is a real hardship, call the IRS’ toll-free number, (800) 424-1040, and ask for the accounts section. They may work out an installment plan and may waive penalties.

Q: What happens if my preparer makes a mistake?

A: This is a well-justified worry, as a recent Money magazine survey showed that more than half of 50 preparers asked to compute tax owed by a hypothetical family made significant errors.

Unfortunately, you are still liable for penalties and interest, even if a preparer made the mistake. “You’re in no way off the hook, so at least take a reasonable look at what’s been done for you to see if anything is obviously out of line,” tax adviser Block says. “If there is any question, ask the preparer.”

Q: Where can I get last-minute advice or forms?

A: Many certified public accountants, enrolled agents and other professional preparers are swamped now and cannot properly handle new clients. However, the IRS and state Franchise Tax Board are offering extended weekday and Saturday hours to answer questions.

If you still need forms, it may be too late to get them by phone or letter. You may have to go directly to an agency office or to your local library, where forms might be available to be photocopied.

Q: What are the most costly errors made by last-minute filers?

A: One of the most common is forgetting to sign your return. That can delay your refund, because the IRS will send back your return for your signature. Another common and possibly costly error: failure to include a check for any money you owe. That could subject you to the 0.5% late payment penalty, plus interest.

Other frequent boo-boos include math errors and failure to include your W-2 form. They also could delay your refunds.

Q: When can I expect my refund?

A: If you had filed earlier in the year, you could have received it within five to six weeks. But now, at this late date, don’t expect a refund for at least eight to 10 weeks.

However, if you file electronically through a tax preparer offering the service, you still could have it within three weeks, IRS spokesman Giannangeli says.

If 10 weeks have passed and you haven’t received your refund, call the IRS at (800) 554-4477. A computer will check the status of your refund. But make sure you have a copy of your return, because the computer will ask for your Social Security number, filing status and the refund you expect.

If you don’t receive your refund within 90 days, the IRS owes you interest payable at an annual rate of 11%.

Q: Will filing closer to the deadline, or filing for an extension, decrease my chances of being audited?

A: Some tax preparers say it does. But the IRS contends that the timing of your filing makes no difference in your chances of being audited. That is because the actual selection process for returns to be audited doesn’t start until at least a year after the filing deadline, the agency says.

Q: When will I know if I’m going to be audited?

A: The IRS has three years from your filing date or due date (whichever is later) to audit your return. If you file for an extension, that extends your filing date or due date. But generally, if you haven’t been served an audit notice within two years after you file, chances are you won’t be audited at all, tax expert Block says.

There are some exceptions to the three-year rule. You may be subject to an audit within six years if you omit income from your return equal to more than 25% of the total income you report. And you can be subject to audit indefinitely if you don’t file, or if you file fraudulent returns that omit significant income or overstate deductions.

Q: How long do I need to keep records?

A: Generally for three years, the period in which you generally can expect to be audited. Many taxpayers believe that getting a refund means the IRS has approved their returns, and thus they can toss their records. Not so.

“All a refund check means is that the IRS has checked the math on your return, and they sent what you show,” Block says. “In no way does that mean your return has been audited and you can throw your records away.”

Some records, such as purchases and improvements on your home or investments in stocks, should be kept longer.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.