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Tax time: Frequently asked questions

By Howard Abrams, PBS Tax & Bookkeeping

Q. I cannot file my taxes by April 18. 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 income tax return until Oct. 17, 2011.

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. Therefore, if you think you are going to owe money on your 2010 return, you should get it paid by April 18, 2011, so you can eliminate the late payment penalty.

You will have to estimate the amount of tax due. Don’t lowball this amount, as the IRS can invalidate an extension if the tax is understated. Send a check for what you owe along with the Form 4868. Your estimate needs to be as accurate as you can make it. If you do not pay your tax in full, the IRS will calculate penalties and interest on your outstanding balance.

If you owe taxes and pay the balance when you file your tax return after April 18, even though you have a valid extension, you can bet the IRS will hit you with late payment penalties.

If you’re in a refund situation and you file an extension, there will not be any underpayment penalties.

Q. My tax return is finished, but I don’t have the money to pay for it. What can I do?
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.

Lastly, you can request an installment agreement. If you file your income tax return on time and do not owe more than $10,000, you can get a guaranteed installment agreement by filing Form 9465, “Installment Agreement Request,” with your tax return. The tax must be paid in three years.

The IRS will usually accept installment agreements on Form 9465 from taxpayers if the unpaid liability is $25,000 or less and the tax will be paid within five years. There is, however, no guarantee of acceptance of an installment agreement with tax liabilities above $10,000.

Taxpayers who have an installment agreement for a prior year cannot file Form 9465. In that case, they will have to negotiate with the IRS.

Q. Why do I have to pay a large 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. This is in addition to your federal income tax.

In many cases, the itemized deductions and number of exemptions combined will be close to or exceed the adjusted gross income. This will result in a low or zero taxable income, which relates to 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. I haven’t filed my taxes for many years. Should I start now?
A. Absolutely! Getting back into the system will lift a huge burden off your shoulders. 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 you are afraid to contact the IRS. Besides, if you have a refund coming for any return older than three years, you can kiss that money goodbye.

Because the IRS is more interested in getting the delinquent taxpayers back in the habit of filing the returns and making up for past filings, non-filers 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. It is best to file the omitted returns before the IRS contacts you.

The fact that you are not able to pay the back taxes should not prevent you from filing those returns. Once the return has been filed, you can discuss your payment options with IRS officials, who may be surprisingly lenient. You should also try to get the penalties waived if you have a reasonable excuse. 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 returns.

Q. Why do I have to pay my estimated taxes?
A. April 18 is not only the due date for filing your 2010 tax return, but also the due date of your first estimated tax payment for 2011 taxes. If you decide not to pay your estimated income taxes on a quarterly basis and instead wait until the end of the year, don’t be surprised to find out that you’ve been charged penalties by the IRS.

The IRS wants to get its money on a timely basis and has set up a method of paying estimated taxes four times a year. If you do not adhere to this schedule, then you are subject to penalties for underpayment of your taxes. If you are unable to pay the full amount set up by your tax preparer, pay as much as you can to reduce potential penalties. Be smart and pay something. LL


Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax professional.

This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at www.pbstax.com.

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