Late returns: If you haven't filed your income taxes yet, you're not alone
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It's nearly mid-July, and although income tax returns for last year were due three months ago, some people still have not gotten around to filing them.
While it's not an ideal situation, it's also not uncommon.
Some people are natural procrastinators and may not be in any hurry to file their taxes if they don't believe they owe the government any money. But they will miss out on their economic stimulus rebates if their returns aren't filed by Oct. 15.
"There are procrastinators and people who owe money [to the government] and don't want to face it," said Howard Davis, president of Davis, Davis & Associates, a Downtown certified public accounting firm. "They might put it off because they don't have the money to pay."
They should still, however, file a tax return in order to qualify for the stimulus rebate, because even if they can't pay what they owe Uncle Sam, the stimulus money will be applied to the tax bill, effectively reducing the amount due.
If someone who owes money hasn't yet filed an income tax return and didn't ask for an extension before the Apr. 15 deadline, he also will be subject to state and federal penalties and interest on whatever he owes.
Those penalties grow by 5 percent each month up to a maximum of 25 percent for both state and federal taxes. On top of that, they would pay a 5 percent interest rate to the federal government and a 7 percent interest rate to the state of Pennsylvania on the outstanding tax bill.
Mr. Davis said people who owe up to $25,000 to the federal government can work out a payment plan for up to five years without having to provide a whole lot of personal financial information to determine their ability to pay.
Taxpayers who owe no money are not subject to penalties and interest for filing late returns.
"Technically there is a penalty for failure to file a tax return," said Alex Kindler, a CPA with the Horovitz Rudoy & Roteman accounting firm, Downtown. "But from a practical standpoint, if you owe no money, the IRS rarely if ever assesses that penalty on an individual who owes no tax."
However, if a person is entitled to a refund and doesn't file a tax return within three years, he or she will lose the refund.
John Harris, president and CEO of JK Harris & Co., a national tax resolution firm based in Charleston, S.C., said the average client his company works with is 31\u20442 years behind on filing tax returns.
"Tax resolution companies can't do anything for individuals they can't do for themselves," Mr. Harris said. "But for the same reasons 55 percent of Americans pay to have their taxes prepared by professionals, they hire tax resolution companies."
Tax resolution companies are used by people who have not filed tax returns for a number of years and owe money for all those years.
"We get people back in compliance so that we can then keep them out of the cross hairs of the IRS' enforced collection machinery, which is vicious."
Mr. Harris said that once the company gets a client's taxes filed, counselors calculate the penalties and interest to find out exactly how much he owes in order to work out a compromise and an installment payment plan with the Internal Revenue Service if he cannot pay in a lump sum.
For those taxpayers who prefer to negotiate with the IRS on their own, the California Society of CPAs suggests the following steps for people who are late paying their taxes:
• Pay what you can afford when you file the return, then wait for a bill for the remaining balance.
• Borrow money from a relative or take out a loan to pay your bill.
• Pay by credit card.
• Pay by installments.
• Propose an offer in compromise.
• Declaring bankruptcy will suspend most collection activities by the IRS.
"The IRS is the ultimate bill collector," said Fred Bogart, a CPA in Paso Robles, Calif., and a member of the California Society of CPAs. "I would recommend filing a return as soon as possible to establish what the tax liability is. Then they can work with the IRS on an installment plan or an offer in compromise.
"The important question to ask is why is someone in this situation and hopefully prevent it from happening again."
First Published July 9, 2008 12:00 am
