“You don’t pay taxes – they take taxes.”
Chris Rock
The big question that is commonly asked by income earners is, can we avoid paying taxes? Whether you are self-employed or work for an employer, your income is subject to taxes. Along with that comes the annual tax filing to determine whether you have paid sufficient taxes during the year. In some cases, taxpayers overpaid and enjoy a nice refund check. On the other hand, the most dreaded outcome, is ending up with a tax liability to the federal and/or state.
A Notice Should Not Be Ignored
For one reason or another, whenever a notice or letter is received from the IRS, it sets off a chain of emotions and the first reaction is to panic. What happens next or the decision you make with it, is most crucial. Determine right away the action items outlined, if any, and the due date(s) by which to respond.
Tucking it away in your file cabinet or desk draw should be avoided at all course. That is just an invitation for a bigger problem or tax nightmare. Time passes by very quickly and missing due dates for your response will become quite costly.
One thing to keep in mind is that a letter from the IRS is not always for a tax bill. Sometimes a notice is sent just to inform you of an action or adjustment made on your recently filed tax return. In other situations, they can ask for information on a prior year tax return to substantiate claims for certain credits, or deductions such as:
- Proof of charitable contributions (for cash payments)
- Support for medical expense deductions (cancelled checks, invoices, etc.)
- Documentation of claims for child tax credit, earned income tax credit, etc.
What is also important to know is that some of the letters and notices are computer generated and the notice number at the top begins with CP. Once again, pay close attention to the date by which a response is due, if needed. Pay careful attention to the reference or reason for the notice so you can determine the next course of action.
No Refund and You Owe Taxes-Now What?
Receiving a refund on your income tax return is the ideal expectation; however, it is not always the case. The deadline to file your tax returns and pay any taxes due each year is generally April 15th (or a few days later, if it falls on a weekend). Interest and penalties will begin to accrue on any balance due that’s not paid in full by that due date.
There are some taxpayers who calculate the numbers before submitting the return for filing. If the outcome shows a liability, there is the temptation to skip or delay filing beyond the April 15th deadline. Off course, an extension can be granted for an additional six months to file. What they sometimes overlook or are unaware of is that payment is still due on April 15th.
Paying sufficient taxes throughout the year by either payroll withholdings or submitting quarterly estimated taxes are preferred. This can avoid the unwelcomed liability when the tax returns are filed. The real problem starts when that tax bill is not paid on time and the interest plus additional penalties accrue.
There are two (2) penalties that the IRS imposes related to late income tax filing:
- Failure-to-file – This is usually 5% of the tax owed for each month that the return is not filed. This penalty can go up to the maximum of 25%. There is also a minimum penalty if your return is filed beyond 60 days late. This amount can be the lesser of $485 or 100% of the tax owed.
- Failure-to-pay – This penalty is one-half of one percent, for each month, or part of a month. This also goes up to the maximum of 25% of the remaining balance from the due date until paid in full.
Interest Rates Can Be High
Consider this as well, the IRS will apply your payment to the tax first, then to the penalty and then to the interest. In some instances, a taxpayer can qualify for a first-time penalty abatement. (Penalties) Your tax bill will show the total penalty assessed up to the time of the notice.
Another important thing to know or to keep in mind, is that the interest rate on unpaid tax liabilities can be quite steep. The IRS rates for individuals can be as much as 7% and as much as 9% for corporations. Depending on the amount you owe, that can be a considerable addition you want to avoid.
There Are Options Available
There are millions of American taxpayers with outstanding tax debts and the IRS is aggressively boosting payment collection efforts. Believe it or not, some of these bills started off with very small amounts. The accrued interest and penalties changed the entire dynamics. Resolving these tax debts oftentimes becomes very expensive, not to mention, quite overwhelming.
Thankfully, the IRS has several options to assist individuals and businesses that find themselves needing help. Here are a few services offered to taxpayers who have difficulty paying their bills:
- Offer in Compromise
- First-time penalty abatements
- Online long-term and short-term payment plans
- Installment Agreements
The key takeaway here, if you got nothing else, is do not ignore or put off dealing with a tax bill.
Tax Professionals Knows The Tax Systems
There are tax professionals such as Enrolled Agents (EA) and Certified Public Accountants (CPA) that specialize in IRS resolution services. Dealing with the IRS on your own can be a bit intimidating, particularly if you don’t know the right questions to ask.
Tax Pro’s know how to navigate the tax systems much better than you can. Seek help, it will save you time and possibly a whole lot of money.
Helpful Links:
https://www.irs.gov/payments/penalties