Some Tips to Stay out of Trouble with the IRS

November 22nd, 2011

1.  File your personal income tax return by April 15 of each year even if you cannot afford to pay the taxes you owe.  If you don’t file on time, the IRS will not only add on a penalty for failure to pay (FTP) on time, but also a penalty for failure to file (FTF) on time.  In addition to the penalties, interest is also added on to the balance due.2. If you obtain an extension to file your tax return, the IRS will not assess a FTF penalty against you as long as you file by the extension due date.  However, an extension to file, does not necessarily protect you from a FTP penalty.  In order to avoid the FTP penalty, you must estimate the amount of taxes you will owe and pay at least 90% of what you owe with the extension.  When you file your return by the extension due date, you must then pay off any remaining taxes you owe.

3. If you don’t file your tax return, the IRS can prepare a substitute for return (SFR) for you to take the place of your return.  When the IRS does this, they will not take into account any exemptions, deductions or credits you may have.  Therefore, any taxes you owe will generally be much higher than if you filed your own return.  Once you file your own return, the IRS will generally replace the SFR with your return.  However, the IRS will examine your own return much more closely and may choose to audit you.

4. If you are an employee (W-2), make sure you have sufficient federal (and state) taxes withheld from your pay check each pay period.  If you are under withholding and owe the IRS each year, the IRS may send your employer a letter requiring your employer to withhold additional taxes from your pay check.  Thereafter, you generally cannot change your withholding again until you stop owing taxes and have paid off any balance due.

5. If you are self-employed, you must make estimated tax payments to the IRS (and state) every quarter to avoid owing taxes each year.  That way, you can avoid having to come up with a large tax payment when you file your tax return.   If you don’t make quarterly estimated tax payments, the IRS will assess you with a penalty for failure to make estimated tax payments.  In addition, the IRS will add on a FTP penalty if you cannot pay the amount you owe with your tax return.  Interest is also added on to the amount you owe.

Always file your tax returns each year even if you think you won’t owe the IRS any money.   If you have an overpayment or refund due to you, unless you file your tax return within 3 years of the date it was due, you will lose the refund.  For example, if you had a refund of $1,000 due to you for 2008, unless you file your tax return by April 15, 2012, you will not receive the refund of $1,000.

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