Everyone is now focused on getting their information together to prepare and file their 2010 individual income tax returns. In fact, many have already done so. I wanted to bring a few items to your attention as this filing season draws to a close.
One item regards amended returns. Invariably from time to time, taxpayers overlook an important piece of information when preparing their returns. Often times, they realize this only when contacted by the IRS (in situations where reportable income has been omitted from the return). In some cases, certain items of deductions were missed and are found when preparing for the current tax year. In any event, please know that you can file an amended return and claim for refund within three years of filing the original return. In the case of missed income, the letter from the IRS asking for more money may not be correct. While in some cases it is, often times it is not. Preparation of an amended return will ensure the correct taxes are being paid. In the case of an overlooked deduction, if the item is of a large enough amount, it can result in a refund from taxes being overpaid on the original return.
The second item I wanted to bring to your attention is the form 4868, which provides for an extension of time to file a return. If you are having a hard time getting your tax information together or just can’t seem to get it done and are in a panic about meeting the April 18th deadline (yes, taxes are due this year April 18th, not the 15th due to a federal holiday in the District of Columbia), you can request an extension of time to file. Once you file this form, you have an automatic extension of time to file your return up to October 17, 2011 to file your return. Many taxpayers do this to allow them more time to complete a more accurate return. Some taxpayers receive tax documents so late that it just makes good sense to file for an extension. Rushing at the last minute could provide for unfortunate tax consequences. One important thing to note – the extension of time to file does not provide for an extension of time to pay. On the extension of time to file, you are required to estimate your tax liability, fill in how much you have already paid on your 2010 liability through withholding or estimated taxes, and then send in a check with the estimated remaining liability. However, there is good news here also. If you estimate you have a liability, but cannot pay it with the extension, the extension will be granted anyway. Any tax owed when you file your return will be assessed with late payment penalties and late payment interest. If you do not request an extension of time to file and file late, the late filing penalty is 5% per month or part of a month the return is filed late up to a maximum of 25% of the tax owed. The penalty for late payment, however, is only ½% per month.
The last item to discuss is what to do if you owe taxes and can’t pay them. The IRS allows for installment agreements to be made in situations where the taxes cannot be paid. Generally, they are required to enter into these agreements if the tax liability is $10,000 or less and the tax can be paid within 3 years and you agree to comply with applicable tax laws. The most important thing to do, even if you can’t pay your taxes, is to not bury your head in the sand and not file the return. You will avoid a substantial amount of penalties if you at least file the return, and then proceed to work out a payment plan.
I hope this article has been of interest and help. I’ll be back later in the year to update you on any tax legislation and items of interest as you plan your 2011 tax year.