If you file form 4868 and are unable to pay the tax due, the penalty is 0.5% a month. If you file your taxes and are unable to pay the tax due, what is the penalty? Is it 5% a month (till a maximum of 25%), or is it 0.5% a month till October 15, then 5% after that?
Is there a way to file your taxes and still get the 0.5% penalty a month?
With form 9465, you pay in installments and the penalty is 0.25%. But there is a chance that your request for installment will be denied if you were in an installment agreement last year.
The late payment penalty is .5% per month unless it's reduced because you enter into an installment agreement or increased because you ignore notices. It never gets above 1% per month, and regardless of how fast it accrues it can't exceed a total of 25%.
Late filing penalty of 5% per month, to a maximum of 25%, applies if you neither file nor pay. When it's running concurrently with the late payment penalty it's reduced by the amount of the late payment penalty, so for the first 5 months of nonfiling the total penalty is 5% per month.
That's because an installment agreement requires that you timely file and pay future taxes. Otherwise you wind up in an endless cycle of late payment. This is why it's important to consider that requirement when setting an installment agreement in the first place. It's better to make sure you'll be able to pay the taxes that are currently accruing even if it means it will take you longer to pay off the delinquency.
There are penalties for Failure to File (FTF) and Failure to Pay (FTP).
If you file your balance due return after the regular or extended due date, you will be assessed a FTF penalty computed at 5% per month or part of a month up to a maximum of 25%. However, whenever the FTF and the FTP run concurrently, both penalties are assessed at a combined rate of 5% per month, effectively making the FTF penalty alone 4.5% per month, or a maximum of 22.5% (4.5% X 5 months).
For example: If you extended the due date of your 2007 return until October
15, 2008, but did not file the return until December 1, 2008, and you owed $1,000, you would be liable for 2 months of FTF penalty at 4.5% per month ($1,000 X 2 X .045 = $90 FTF). You would be liable for 8 months of FTP at 0.5% per month ($1,000 X 8 X .005 = $40 FTP).
You also are liable for interest in addition to the two penalties.
As long as you file your return by the regular or extended due date, you will not be liable for the FTF penalty.
If you change the facts in the example above to have you file the return by the extended due date of October 15, you only will be liable for the FTP penalty (and of course interest).
This makes sense. If someone enters into an installment agreement for the first time, they should be aware of the above.
But what if the person did an installment agreement last year and it is paid off in full, and they have lots of tax due this year? If the IRS does not let them enter into an installment agreement, then what? Borrowing money on a credit card would be 20% annual interest and they would still be in a cycle of late payments, except these late payments would go to the credit card company.
So the question is, would the request for installment agreement be accepted or denied? It is not automatic acceptance if you had an installment agreement agreement in the previous year, but then again that installment plan has been paid off in full.
Ask again. Failing that, keep making payments on your shcedule.
If there's not a current IA in place, then they'll accept the new one if it otherwise meets the criteria.
I've had clients in IA's that had to redo the IA to tack on the balance of the current year even though they made what was thought to be adequate estimated payments.
It's not an automatic "NO" either.
If you made the installments as agreed, and made estimated payments as well, but still end up being short, they don't beat you over the head about it. If anything, you are the exception, as there are lots who do not make the installments as agreed, or the estimates, or some combination.
On another board we've discussed a situation in which form 4868 is filed without any additional tax being paid. There were posts from tax pros who stated that clients had not been billed the 5% per month FTF penalty even though their balance due was substantial. only the other penalty,
0.5% and of course interest were charged.
But no one could opine or offer evidence as to just when IRS policy changed or why.
I'm working strictly from fading memory here, but as for the when, I think it was back when Fred "I never met a delinquent taxpayer I didn't like" Goldberg was Commissioner or Asst. Secretary for Tax Policy, which would put it during the Bush I administration. I distinctly remember throwing a perfect fit when IRS gave up even the pretense of making the taxpayer come up with a reasonable estimate and pay the balance due with the 4868.
As for the why, it was Goldberg who espoused the theory that people don't comply only if they don't understand or IRS makes it too hard, and IRS executives didn't get to be IRS executives by dissin' the boss. Compliance never has recovered.
Policy statements were declassified in the 1970's, so someone with too much time on his hands could probably dig up more specifics.
An extension filed without payment can be voided, but not arbitrarily. Many years ago (early 90s?), I secured a 1040 on October 15. The (then) 4 month automatic extension and the 2 month additional extension both showed zero tax due. The return showed $50,000 tax due (and not paid with return.) The taxpayer and his preparer both admitted to knowledge of a sizable tax liability when the extensions were filed. I considered the extensions to be invalid and ignored them. My prompt assessment included the 25% failure to file penalty. The taxpayer's attorney argued that only the Examination Division had the authority to invalidate an extension and then assess the FF penalty. Subsequent research determined him to be correct. In this case, the penalty was abated (and later reassessed via the proper Examination process.)
I can't recall the regs, rules, or manual sections relevant to this, but the policy has been in place for a long time. As far as I know, there is no systemic review process to invalidate an extension. In my experience, absent human intervention, the extension will stand with or without adequate estimation and payment of tax due.
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