By Howard Abrams
PBS Tax & Bookeeping
Q: I can’t gather all my paperwork to file income taxes by April 15. What should I do?
A: You should file an “Application for Automatic Extension of Time,” Form 4868. An extension means that you are extending the filing of your return until Oct. 15, 2009.
By filing the extension application, you will eliminate a late filing penalty. However, it is not an extension of time to pay any taxes due.
If you think you are going to owe money on your 2008 return, estimate the amount of tax due and pay it by April 15, 2009, so you can eliminate the late payment penalty. If you owe taxes and pay the balance when you file your tax return after April 15, you can bet the IRS will hit you with late payment penalties even though you have a valid extension.
An extension is valid even though the estimated balance due is not paid.
If you’re in a refund situation and file an extension, there will not be any underpayment penalties.
Q: My tax return is ready to be filed, but I do not have the money to pay the taxes due. Can I set up a payment plan?
A: File the return on time, or file for an extension to avoid a late filing penalty of 5 percent per month – up to 25 percent. If you think you can make the payment within a few months of filing, pay as much as possible with the return or extension. Mail the balance when you receive the IRS notice of tax due.
Paying by credit card is another option; however, a percentage of the tax due is charged as a convenience fee plus interest at the credit card rate. This can be costly.
You can also request an installment agreement. If you file your income tax return on time and owe no more than $25,000, you can generally get an installment agreement by filing Form 9465, “Installment Agreement Request,” with your tax return to set up a payment plan. The tax must be paid within five years.
Any taxpayer who has an installment agreement for a prior year cannot file Form 9465 and will have to negotiate with the IRS. If your liability is $10,000 or less, the 9465 request is guaranteed if you can pay your debt off within three years.
Q: If I’m self-employed, why do I have to pay so much income tax when I have four kids and mortgage interest to deduct?
A: As a self-employed individual, you are taxed on your net self-employment income in addition to your federal income tax. In many cases, your itemized deductions and your number of exemptions combined will be close to or exceed your adjusted gross income, which will result in a low or zero taxable income and low or zero income tax.
However, your self-employment tax is 15.3 percent of your net self employment income. Self-employment tax is actually Social Security and Medicare tax – otherwise known as FICA.
Employees pay half the required amount based on income, and their employer pays/matches the other half. Self-employed individuals, however, are required to pay both sides themselves, double what an employee pays on the same earnings. This system guarantees self-employed individuals the same access to benefits as employees.
Q: What if I haven’t filed a tax return in years?
A: At tax time, nonfilers often become concerned about filing for past years. Not filing your income tax return can get you into serious trouble. If you don’t file for one year, the odds are you are going to be afraid to file for the next year, and suddenly you haven’t filed for three, four or five years.
Because the IRS wants to get the delinquent taxpayers back in the system, nonfilers do not have to worry about going to jail. As long as they cooperate and file their tax returns, the IRS is not going to lock them up.
If you owe taxes, though, you will have to work it out with the IRS. It is best to file the delinquent returns prior to the IRS contacting you even if you are not able to pay the back taxes.
Once the return has been filed, you can discuss your payment options and may find the IRS surprisingly lenient. You should also try to get the penalties waived if you have a reasonable or hardship cause. The interest, however, cannot be waived except in rare cases.
If the IRS comes after you before you have taken the steps to file the delinquent returns, it is still not too late to work out a solution. The IRS will accept a timetable for filing the back tax returns.
Q: Why do I pay a penalty when I pay all my income taxes that are due with my tax return?
A: Many truckers who do not pay their estimated income taxes on a quarterly basis and instead wait until they file their return are often surprised to find out that they have been charged penalties and interest by the IRS. Because the IRS wants to receive its money on a timely basis throughout the year, estimated taxes are due four times a year. The dates are April 15, June 15, Sept. 15, and Jan. 15. LL