Earn Interest Instead Of Paying Penalties For Your 2008 Income Tax Return

By Author: Jeff Parrack
Total Articles: 4762
Comment this article

Some people recall from their school days that the Ides of March (meaning the 15th) was when a group of Roman senators assassinated Julius Caesar. Today, even without knowing it represents the "Ides of April," many Americans have an annual bout of fear and loathing on April 15th, because that's the deadline for filing taxes on the previous year's earnings.

Caesar couldn't put in for an extension on his murder, unfortunately, but you can get an extension on filing your return by using Form 4868, the so-called "application for automatic extension." This gives you six additional months in which to file your paperwork, although you must still remit any taxes owed by April 15th. However, the amount of interest and any penalties depends on a number of factors, so it is entirely possible that you can earn interest instead of paying penalties for your 2008 income tax return, assuming the numbers work out right.

Interest and penalty basics

If you don't file your tax forms when they are due, a date that includes extensions, you may be subject to the "failure to file penalty," which is 5% of unpaid tax for each month ...
... or partial month that the forms are late. This penalty "maxes out" at 25% of the tax figure, but it will be reduced by " failure to pay" penalties (see below) for the months that both penalties are applicable. If your tax return is over 60 days past due, however, the penalty is the lesser of $100 or 100% of the tax due. Importantly, you do not pay this penalty if there is a reasonable explanation for the tardiness.

You may also be subject to a penalty of 1/2 of 1% of the unpaid taxes for every month or partial month after the due date (including extensions) that they remain unpaid, if you remitted less than 90% of the amount due. This penalty, again, maxes out at 25% of the unpaid sum. However, once again you may not have to pay this penalty if there is a reasonable explanation for the delay.

Other penalties

On the other hand, there is a possible penalty of $500 for "frivolous filing" if you send in forms that have insufficient information to calculate the correct tax due, or if you claim an incorrect amount of tax. The IRS may claim that you are asserting a "frivolous position" or are attempting to delay, or even interfere with, the proper administration of the federal income tax code.

There is also the "accuracy related" penalty, where a charge of 20% is levied for an underpayment that is attributable to negligence or disregard of filing rules or other regulations, or a "substantial understatement" of the income tax due. As far as interest goes, you will be charged interest if there is a balance due the IRS after April 15th.

Sample math

Let's assume you earned $100,000 last year and expect a federal tax bill of $20,000. To get around the 0.5% per month penalty, you will have to remit at least $18,000 so that you owe no more than $2,000 when you file following the extension. Paying 90% of the tax liability on or by April 15 means that an extension gives you an additional six months to pay what you still owe, and interest is accruing at a fairly low rate. In the meantime, you can be earning interest on that money, possibly enough (depending on your investments, tax bracket, etc.) to offset the IRS interest. This is a calculation you will have to make for yourself, of course, and if you need help, get some!

If you don't file for the extension and don't submit a return by April 15, you have to prove "reasonable cause" for this to the IRS or you will likely pay the failure to file penalty of $100 per month on that $2,000 balance. If you think you are facing a reasonable cause for such delay, make sure to check the tax code and consider getting some expert advice. This is not an area you want to make mistakes in.

Self-employed people

Some self-employed people may benefit from extension filing, too. You will have until your tax due date, including extensions, to find any retirement accounts for the tax year in question. Even if you don't have one set up yet, a certain kind of IRA account (Simplified Employee Pension Individual Retirement Account, or SEP IRA) can be established as late as the extension-delayed due date, normally October 15th. Simply filing Form 4868 gives you another six months to fund that retirement plan and, of course, deduct the contributions on your return.

A strategy that is increasing common among the self-employed is to pay the total amount of tax due, request an extension and subsequently fund a retirement plan on or before October 15th. Filing an extension does not provide you any extra time to fund a Roth IRA, traditional IRA or an Education Savings Accounts (ESA).

The lesson is simple. The failure to pay penalty is much less than a failure to file one, so always file your tax returns and any extension requests in a timely fashion, even when you are incapable of paying the full amount due at the time. Just by filing on time you will save both money and frustration, and even get you a net gain in interest earning depending on your situation. It is always a good idea to take a moment and check your "tax math," to see if an extension will benefit you.
About Author:
1040-Tax Extension will file your online tax extension with the IRS and guarantee that the IRS will accept your application. Visit us online at http://www.1040extension.com/ for automatic extension on your individual tax return.