Happy Tax Day!

 

guest commentary by David Potts

April 15th: the day Abraham Lincoln died, the Titanic sank and income tax returns are due.

There are a buttload of people every April 15 who owe a lot of income tax but don’t have the money to pay them. Most of these people aren’t deadbeats. They are hard working small business owners who find they lack liquidity because their profits are invested in their businesses. If they were deadbeats the government would be paying them. (I’m not talking about Social Security recipients and those who find themselves temporarily unemployed. If you felt agitated by my reference to deadbeats, you are probably a deadbeat).

So when Thursday arrives and you find yourself financially short what are your options?

One option is to do absolutely nothing. That’s the absolute worst option and the most expensive option. It’s the absolute worst option because the IRS will generally catch up with you. If you refuse to file a return, they will prepare and file one for you and I bet their tax calculation will be higher than yours. It’s the most expensive because the IRS will have no mercy in the assessment of penalties and interest for filing your tax return late. So doing nothing isn’t really an option.

If you haven’t kept good records and you don’t have enough information to prepare your tax return, you only have one real option. You need to file an extension. Filing an extension is simple. Complete Form 4868 and mail it to the Internal Revenue Service or submit it electronically. The only information you need is your name(s), address, and social security number. The form will ask you for an estimate of your income tax liability, how much you have already paid in, and how much more tax is due. If you don’t know, guess. It asks for an estimate. Now notice the title of Form 4868: Application for Automatic Extension of Time to File U. S. Individual Income Tax Return. You’re getting an extension of time to file your income tax return not an extension of time to pay your income tax. The government wants their money by Thursday.

What happens if you can’t pay your income tax by this Thursday? If you fail to file an extension you will be assessed a late filing penalty equal to 5% of the income tax you owe each month until the penalty reaches 25%. If you still haven’t paid your tax at this point you will be assessed an additional one half of 1% late pay penalty each month until the combined penalty reaches 50% of the income tax you owe.

On top of penalties, you are being charged interest. The interest rate charged now is 4% but this amount changes quarterly. If you file for an extension you will only be assessed a late pay penalty and interest on the amount of income tax due. The late pay penalty will also stop when it reaches 25% of the tax due. The state of Arkansas charges the same amounts in penalties but the interest rate is fixed at 10% per year.  (If you are due a refund, don’t sweat it. If there is nothing due there is no penalty and no interest expense.)

It can be costly when you can’t pay your income taxes on time. Since penalties and interest are based on how much tax you owe, make sure you’ve taken every deduction the Internal Revenue Code allows. When you’re confident you’ve reduced your tax liability to the lowest possible amount and you still owe, call your banker. Remember they are in the business to loan money (if they think you will pay them back.)

If your banker says no, there is still no reason to jump off the top of the Arvest building. There’s another form to be familiar with: Form 9465 Installment Agreement Request. The IRS generally will grant your request to pay your tax in installments without much hassle if your total liability is less than $25,000. If you owe more than $25,000 expect the Internal Revenue Service to give you more personal service. If you owe more than $100,000 expect close personal attention.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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