529 Accounts: What Happens When Your Child Doesn't Go to College? Dear Carrie: We've been saving for years in a 529 account for our son's education, but it now looks like he won't be going to college. Are there other options for using this money? — A Reader Dear Reader: One of the great — and …Read more. If One of You Makes More, Can You Still Be Financial Equals? Dear Carrie: We've been married for two years and so far, my husband and I have pretty much split bills down the middle. That's about to change as I become a full-time graduate student with limited income. I'm used to being a financial equal and am …Read more. Can You and Your Spouse Get on the Same Retirement Planning Page? Dear Carrie: My wife and I are in our 50s. I'm a numbers guy and keep a spreadsheet of all our investments. My wife, who is great at managing our everyday finances and easily handles the details, says all those projections make her eyes glaze over. …Read more. Retirement Conundrum: Spend Now or Save for Later? Dear Carrie: I'm 65, and my husband is 73. He says we should spend our money now on things like travel, but I'm a bit more cautious. What if we live into our 90s? — A Reader Dear Reader: There's definitely a delicate balance between spending …Read more.more articles
I Didn't File Last Year's Taxes. Now What?
Dear Carrie: Last year, I was all set to file my tax return, but when I saw how much I owed, I balked and didn't do it. Now I'm scared. Can I still file this year's return? What should I do about last year? — A Reader
Dear Reader: I'm glad you're asking this question — and not a moment too soon. While you don't have to be afraid of the IRS, you definitely need to take action right away. Not filing your tax return is a very costly choice.
There are penalties for both failure to file and failure to pay. The penalty for failure to file is 5 percent per month (or partial month) up to a maximum of 25 percent of what you owe. The failure-to-pay penalty is a less burdensome 0.5 percent of your unpaid balance per month or partial month up to 25 percent. (This is included in the failure-to-file penalty for the first five months if you're paying them concurrently. However, if your return is more than 60 days late, the penalty will not be less than $135 or 100 percent of the balance due, whichever is less.) And on top of these penalties, the government charges interest on your unpaid taxes.
So, let's say your unpaid tax bill is $3,000. Twelve months later, you owe a failure to file penalty of $750 (25 percent). Plus, you owe the 0.5 percent failure to pay penalty on seven months (the first five months were included in the $750) for another $105. Then, let's say you're paying 4 percent a year in interest. That adds another $120. You've increased your tax burden considerably — and it will keep going up until you do something.
And that's not all. If you don't respond to the IRS's attempt to collect your taxes, it can file a lien against you, which is a legal claim to your current and future property for the amount of the unpaid taxes. Plus, this lien goes on your credit report significant black mark.
Fortunately, there are steps you can take to minimize the damage.
HOW TO FILE A PAST DUE TAX RETURN
Gather all your tax documents for the previous year. You say you were ready to file, but you were stopped by how much you owed. Well, take another look. Did you take all the deductions and exemptions due to you to lower your taxable income?
Or might you be eligible for a credit, such as the new American opportunity credit or the earned income tax credit?
If the tax due is still more than you can handle, file your past due return anyway and pay as much as you can.
WHAT ABOUT THIS YEAR'S TAXES?
Filing your past due return doesn't let you off the hook for the current year. Even if you owe back taxes, you're still responsible for paying this year's taxes on time. If this only seems to add insult to injury, you do have some options — as long as you file your return. The IRS offers a few different payment plans depending on your circumstances, including:
— An agreement to pay in full within 60 or 120 days.
— Monthly payments through an installment agreement.
— Temporary delay or significant hardship consideration.
The most important thing is to file on time and pay what you can. Even if you can't pay the entire tax bill, you'll avoid the hefty failure to file penalty. Then working with the IRS, you may be able to lessen or avoid the failure to pay penalty altogether.
WHAT FILING FOR AN EXTENSION MEANS
If you're behind the eight ball in getting your current taxes ready, you can request a six-month extension. But what many people don't realize is that an extension only allows you to file your return late. You're still required to pay your taxes by the April deadline. So, gather your documents and put together your best estimate of current taxes due.
Then include your payment with Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must get this form in the mail by the due date for filing (April 18th for your 2010 return) to avoid the failure-to-file penalty.
WHERE TO GET HELP
If your situation is complicated, you may want to talk to a tax professional to get things sorted out. But as I said, the IRS is ready and willing to help anyone who makes a good faith effort to file their taxes. The IRS offers free assistance online, by phone or in person. Plus, new changes to the lien system make it easier for people with tax debt to clear their record.
Go to IRS.gov or call 1-800-829-1040 for more details — the sooner the better.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2011 CHARLES SCHWAB & CO. INC. MEMBER SIPC