Posts Tagged ‘Tax Penalties’

Tax Refund Tips

Monday, April 4th, 2011

If you provided either your Federal or State government with an “interest free loan” in 2010, it may be time to submit your claim for your income tax refund.  However, there are some important tips and facts that you should know before you file your 2010 tax returns:

  1. Consider e-filing your tax returns -  It will soon become mandatory.  Get on board now.   If you paper-file there will be a delay in the time that your tax return reaches the taxing authorities while it is in the U.S. Postal System.  After it arrives and is sorted, your tax return data will probably be manually keyed in to the IRS system by a seasonal employee and your refund check will be mailed to you six to eight weeks after your tax returns were received.  Add three to seven more days in-transit time while your check  is in the U.S. Postal System and it could be almost nine to ten weeks before your refund check arrives in your mailbox.
  2. Consider using the direct deposit alternative for your tax refunds –  it’s fast, and easy.  Enter your bank name, routing number, and full account number in the appropriate blocks for your paper tax return or tax software (recommended).  If you file your tax return electronically your tax refund will normally be issued within three weeks after you receive an “Accepted” acknowledgement notification from the IRS.  These times will vary with State tax returns.  Ther IRS publishes a refund cycle every year.  Click on this link for the 2011 tax refund cycle information in Publication 2043. 
  3. Revise your Federal and State tax withholding – depending on your tax bracket and total income, an annual income tax refund of  $200-$500 may be acceptable to you to avoid underpayment penalties and interest.  However, if your annual income tax refund is many times this amount, contact your payroll department or revise the amounts for your quarterly estimated tax deposits, or adjust a combination of both factors.
  4. Tax withholding planning tip – if you owe the U.S. Treasury taxes from prior years, an active installment payment plan, partial satisfaction of a tax levy etc the IRS will probably apply your income tax refund to these outstanding balances before determining if any amounts are actually due to you.  A similar practice may be followed by your State taxing authorities.  Read tax planning tip #3 above again!!!  You may need to cancel your reservations for that trip down to St. Barts! (more…)

Do You Require More Time or $$ To Pay All of Your Taxes??

Saturday, April 2nd, 2011

The state of our national economy and the associated high unemployment rate have created many financial problems for all of us.  Addtionally, poor personal financial management and the placement of inappropriate priorities on our financial obligations throughout the year often create significant problems, especially when your unpaid taxes are due.  Note:  This situation is equally applicable to mortgage loans, particularly those that are ARM based,  notes, car loans, payroll tax deposits, business working capital requirements, etc.  This article is intended to provide possible solutions to the problem, and not offer criticism.

Many years ago a fellow employee stated his philosophy on problems to me (true story):  “If you ignore it long enough, the problem will go away!”  This is absolutely not correct, especially when it relates to unpaid taxes.  To the contrary, be proactive and start making telephone calls, sending out e-mails etc as soon as you become aware of the fact that you can not pay your tax obligations when they are due.  There may be options that are available to you for which you do not know.  If you have been notified by either a State of Federal taxing authority, respond to the notification immediately and follow through on the communications until the problem(s) are resolved to the satisfaction of everyone involved.  The list of possible solutions below is not in any order of priority, nor is it intended to be all-inclusive.  It’s simply a starting point:

  1. Request an extension of the time to pay your taxes, especially if there is a personal or financial hardship;
  2. Sumbit an installment agreement request (Form 9465) with your tax return;
  3. Request a “temporary delay” in the payment due dates;
  4. Determine if you may be eligible for an “Offer In Compromise”;
  5. Apply for a loan from your bank;
  6. If available, use some of the available credit from your credit card or line of credit from you bank;
  7. Consider a withdrawal from your savings accounts
  8. Apply for a loan from your retirement account (i.e. 401(K)) but not your IRA which is ineligible. Retirement plan loans usually have to be repaid in five years or less;
  9. Consider a withdrawal from your IRAs.  If you are younger than 59 1/2 you will avoid the 10% premature withdrawal penalty if the funds are used to satisfy a tax levy from the IRS;
  10. Obtain a loan using the cash surrender value of your life insurance policy;
  11. Apply for a loan using the equity in real estate holdings or your investments as collateral;
  12. Sell or liquidate some of your assets, i.e. investments, CDs, etc
  13. Borrow from friends, relatives etc 
  14. If you own a business and there is sufficient working capital available, you could use some of these funds.  Be sure to record the required accounting entry in either the Note Receivable or Accounts Receivable account and re-pay the loan as soon as possible.     (more…)

Are You Meeting Your Quarterly Tax Deposit Obligations?

Saturday, April 2nd, 2011

This subject has been one of the toughest for past clients, other taxpayers, and my college students to comprehend.  This is especially true when discussed in conjunction with the submission of a request for an automatic six-month extension for the time to file a tax return.  The logic is usually communicated in some variation of “I just requested a six month extension for filing my tax return, so I now have six months in which to find the money to pay the taxes that I owe.”  That’s not exactly the way that the system works.  Under certain circumstances, you could be required to have a mandatory 28% of your income withheld to fulfill the “backup withholding” requirements.

The United States income tax system is structured on a “pay-as-you-go” basis.  This means that your income taxes must be paid as you earn or receive your income throughout the year.  You can fulfill this requirement in either one of two ways, which includes a combination of both: 1)  through the payment of Federal (and State) withholding, or 2) by making quarterly estimated tax payments.  If you do not pay your quarterly taxes through withholding taxes or do not pay enough in taxes using that method, you may also be required to make quarterly estimated tax payments.  If the total of all of your tax payments for the year were not paid (remitted) either through withholding or estimated tax payments, you may incur both an underpayment tax penalty and interest for the underpayment of your annual estimated tax obligation. (See the instructions for completing Form 2210).  Addtional information can be obtained from Tax Topic 306. 

The easiest method to meet this requirement is through the Electronic Federal Tax Payment System (EFTPS).  There is usually a State equivalent.  You can apply and enroll online at  The website allows you to designate a bank account from which the funds will be withdrawn electronically.  You can also set up future, recurring quarterly payments and amounts.  Not sure of the amounts?  The system can accomodate changes/updates 24 hours or more in advance of the due date.  If you don’t want the U.S. Treasury to have access to your personal bank account, then contact your bank and set up a separate account just for your tax payments.  There is usually no addtional cost for this account.  If there is, join a credit union!   (more…)

Tax Penalties From Early IRA Plan Distributions

Tuesday, March 1st, 2011

As is the case with many areas of the income tax laws, retirement plans can be a relatively complex subject.  This situation is further compounded by the fact that there are literally hundreds of different retirement plans throughout the United States. This post is strictly limted to the additional income taxes that are associated with (related to) the early withdrawal (distributions) from a “traditional IRA” retirement plan.

If you are eligible to participate and have made contributions to your Individual Retirement Arrangement (IRA) plan those contributions are considered to be “tax deferred” , specifically the income is not reported on your W-2 in the year that you earn it.  The income will not be taxed until you begin receiving distributions from your IRA plan.  One of the fundamental tenets for establishing an IRA is to postpone the related income taxes from the present time (based on your current income tax bracket rate) until you have retired and will probably be earning less or may/will be in a lower income tax bracket rate.   The earliest point in your life in which IRA plan distributions can be received by you, without a 10% tax penalty (essentially a surtax), is age 59 1/2.  You must begin receiving distributions prior to April 1st in the year after you have reached the age of  70 1/2.  At that age you must receive at least the  “Required Minimum Distribution” (RMD) each year.  From the IRS website:  “You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.  The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA.”

You will receive a 1099 R from your retirement plan administrator if you have received an “early distribution” from your IRA plan.  Look in Block #7  (Distribution Code) of that form and there will be a code “1”.  Your tax software will correctly report all of the income (i.e. either on line #15 or #16 of your Federal form 1040) and the early distribution 10% tax penalty will appear on line #58. 

There are fifteen “exceptions” to the 10% early distribution tax penalty which are provided in the tax laws.  These exceptions can be found using this link to the IRS website.   The best source for information related to Individual Retirement Arrangements (IRAs) is IRS Publication 590. 

If you have any questions or are not absolutely sure of the facts and income tax reporting requirements, you should contact the IRS (1-800-829-1040), your IRA retirement plan administrator, your tax preparer, or your CPA.  In complex situations “all of the above” may be the best answer! 


Failure to Pay and Failure to File Penalties

Thursday, March 18th, 2010

This can be a relatively complex subject based on the myriad of tax returns that are required to be filed by taxpayers.  The major income tax returns  are the Form 990 (Tax Exempt organizations), Form 1040 (Individuals), Form 1041 (Estates and Trusts), Form 1065 (Partnerships),  Form 1120 (Corporations), and the Form 1120-S (Sub Chapter “S” Corporations).  The best guidance available as to filing instructions and due dates is provided by the IRS website (  Search for the instructions for your specific tax return and then carefully review the information that is provided in the document.  Most states follow the Federal guidelines since the state returns utilize your Federal return as a starting point for your state tax obligations.  However, this is a general rule and the state department of revenue requirements should also be reviewed.

In my profession we have an adage (that is shared with the IRS) “Ignorance of the law is not a defense!”

If you can not file your tax return by the statutory due date request an extension of the time to file.  There are legitimate reasons for encountering this situation.  However, an extension of the time to file your tax returns is NOT an extension of time to pay your taxes.  The taxes (including your best estimates) have to be remitted to the taxing authority on or before the original due date.  If you can not accurately determine your tax liability there are “safe harbor” rules which if followed will usually allow you to avoid interest and penalties.

Additonal information on this subject is provided below:  (more…)