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Sponsored by Taxsoftware.com   http://www.taxsoftware.com        September 5, 2007        Issue 11

Special Interest Articles

Late Corporate Returns are due on September 17. Haven't Filed an Income Tax Return? Here's What to Do

It's Important to Pay Taxes in Full

How Can I Save Money By Paying My Taxes?

Tax Payments FAQs

 

                                                                         

Late Corporate Tax Returns are due on September 17

Haven't Filed an Income Tax Return?

Here's What to Do

File All Tax Returns

Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.

Facts About Filing Tax Returns

bulletFailure to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could increase your tax bill by 25 percent or more.
bulletThere is no penalty for failure to file a tax return if a refund is due. But by waiting too long to file, you can lose your refund.  In order to receive a refund, the return must be filed within 3 years of the due date.  If you file a return, and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later.
bulletTaxpayers who are entitled to the Earned Income Tax Credit must file a return to claim the credit even if they are not otherwise required to file.  The return must be filed within 3 years of the due date in order to receive the credit.
bulletIf you are self-employed, you must file returns reporting self-employment income within three years of the due date in order to receive Social Security credits toward your retirement.

NOTE: Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.  Continued non-compliance by flagrant or repeat nonfilers could result in additional penalties and/or criminal prosecution. 

Getting Free Help to File Late Returns

The IRS offers free assistance by computer, telephone, facsimile and in person.  The IRS can assist taxpayers with obtaining forms, publications, and answers to a wide range of tax questions. 

If you are a wage-earner, and have misplaced your W-2 Forms showing your income and income tax withholding, and you are unable to obtain duplicate copies from your employer, IRS can often provide you with that information after the annual matching programs are run.  Matching programs are run after filing season, and the information is usually available in late August of the year in which the tax return is due.

If you think your employer did not report your wages, contact IRS for assistance on how to file your tax returns.  If you can establish that your employer withheld taxes on your salary (normally by providing pay stubs), you will receive credit for your social security and income tax withholding even if IRS did not receive the withheld tax.  If your employer failed to withhold the taxes, you must still file your return.

The Volunteer Income Tax Assistance (VITA) program and IRS e-file joined forces several years ago to bring electronic tax filing to VITA sites.  Since then, volunteers prepare tax returns on computers and ultimately transmit them electronically to the IRS.  It’s free of charge for individuals of low to moderate income.

Individuals and joint filers whose income exceeds VITA program criteria, as well as businesses (i.e. filing Schedules C and E) should seek professional assistance for return preparation.  The “Authorized IRS e-file Provider” database is a nationwide listing of all businesses that have been accepted to participate in the electronic filing (IRS e-file) program.

Free IRS Assistance With Your Tax Return

Telephone

Taxpayers may order current and prior year forms, instructions and publications by calling 1-800-TAX-FORM (1-800-829-3676). Taxpayers may ask the IRS tax questions by calling the toll-free customer service line at 1-800-829-1040. TTY/TDD users may call 1-800-829-4059 to ask tax questions or to order forms and publications.

Walk-In Service

Many post offices, libraries and IRS offices have tax publications, forms and instructions available to pick up.

Taxpayer Assistance Centers

Taxpayers needing face-to-face help solving individual or business tax problems can get help every business day in every IRS Taxpayer Assistance Center. Taxpayers can receive assistance with issues such as IRS notices, payment plans, federal tax liens and levies, innocent spouse claims and offers in compromise.

The IRS encourages taxpayers to call ahead for appointments at their convenience or to hear a recorded message with office hours and locations. Local phone numbers for Taxpayer Assistance Centers are available in telephone directories and are posted online.

From January through April 15, many Taxpayer Assistance Centers offer extended evening hours, Saturday service at shopping malls and mobile units/circuit riders in remote communities to make obtaining assistance more convenient for taxpayers during the tax filing season. 

Multilingual assistance provides non-English speaking taxpayers equal access to all services.

 

Documents Required to Prepare a Return

In order for the IRS to assist with preparing a tax return, taxpayers should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.  Some of the documents may include:

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Forms W-2 – Forms from employers showing wages for the year.
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Forms 1099 – Forms from banks and other financial institutions showing interest and dividends.  Forms 1099 also report self-employment income.
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Information on expenses to claim on the return, such as itemized deductions, child care expenses, or employee business expenses.
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Social Security numbers for dependent children and any other person claimed as a dependent
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A copy of the last tax return filed.

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It's Important to Pay Taxes in Full

Whether paying with a timely filed tax return, or filing late and paying late after receiving a bill from the IRS (and the bill is correct), taxpayers are encouraged to pay the taxes they owe in full. If taxes are not paid, and no effort is made to pay them, the IRS can ask a taxpayer to take action to pay the taxes, such as selling or mortgaging any assets owned or getting a loan. If effort is still not made to pay the bill, or make other payment arrangements, the IRS could also take more serious enforced collection action, such as levying bank accounts, wages, or other income, or taking other assets. A Notice of Federal Tax Lien could be filed that may have a detrimental effect on a taxpayer’s credit standing. See information about Liens and Levies.

Ways to Pay Taxes

Payments can be made by credit card, electronic funds transfer, check, money order, cashier’s check, or cash.

Electronic Payment Options for Individuals and Businesses

Electronic payment options are convenient, safe and secure methods for paying taxes. Taxpayers can authorize an electronic funds withdrawal, use a credit card, or enroll in the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS).

Electronic payment options give taxpayers an alternative to paying taxes by check or money order. Payments can be made 24 hours a day, 7 days a week.  The electronic funds withdrawal and EFTPS options are free!
 

Payments by credit card can be made through one of two official vendors:

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Official Payments Corporation at 1-800-2PAYTAX (1-800-272-9829) or visit the Official Payments Web site.

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Link2Gov at 1-888-PAY1040 (1-888-729-1040) or visit the Pay1004.com Web site.

Electronic funds transfers directly from a bank account can be made by enrolling in the Electronic Federal Tax Payment System (EFTPS).

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EFTPS or

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call 1-800-555-4477

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Publication 966, The Secure Way to Pay Your Federal Taxes

Payments by check, money order, or cashier’s check, should:

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Be made payable to United States Treasury (or U.S. Treasury)

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Include the social security number or employer identification number, tax period, and related tax form number

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Be mailed to the address listed on the notice or instructions

Cash payments can only be made in person at a local IRS Office. Do not send cash through the mail.

Other Ways to Resolve Tax Debts

Taxpayers with a balance due on their return should consider:

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Cash advances on credit cards

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Bank loans

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Liquidating savings accounts, savings bonds, stocks, etc.

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Borrowing against 401(k), Life Insurance, etc.

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Using equity in real estate or other assets

Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of penalties interest and penalties owed will be lessened. They should then immediately call the number or write to the address on the bill they receive, or visit the nearest IRS office to explain their situation.

Based on the circumstances, a taxpayer could qualify for an extension of time to pay. The IRS is willing to offer extensions of time to pay in order to assist in tax debt repayment. A taxpayer can request an extension from 30 - 120 days depending on the specific situation. Penalties and interest incurred will be less through an extension of time to pay rather than seeking to enter into an installment agreement.

If a taxpayer cannot make payment in full upon receipt of the bill, the IRS may request a Collection Information Statement (CIS) to compare individual or business monthly income with expenses and to assist in determining a payment plan.

More ways taxpayers can use to resolve their debt include:

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Monthly payments through an Installment Agreement,

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Temporary delay or significant hardship consideration, or

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Offer in Compromise

When do Penalties and Interest Apply?

Penalties and interest do not apply in years in which a taxpayer is entitled to a refund. About a third of those who file returns for past years discover they have a refund coming.

Penalties and interest apply to years in which money is owed. The interest charged on late payments changes quarterly. During the last several years the interest rate has ranged from a high of 9 percent to a low of 4 percent.

The penalty for filing late is generally 5 percent per month, or part of a month, up to 25 percent of the amount of the tax shown due on the return. The penalty for paying late is 1/2 of 1 percent per month, up to 25 percent of the unpaid amount due.

The IRS recognizes many people drop out of the system because of personal problems, including serious illness, a death in the family, or loss of financial records in a natural disaster. Depending on the situation, informing the IRS why returns have not been filed could result in a waiver of penalties.

 

Other Considerations:

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Taxes paid in a timely manner reduces the amount of penalties and interest a taxpayer may owe

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Interest is calculated on the unpaid balance, penalties, and interest that has been charged to the tax account

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While making payments on a tax debt through an installment agreement, penalties and interest continue on the unpaid portion of that debt

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The interest rate on a bank loan or cash advances on a credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code

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How Can I Save Money By Paying My Taxes?

Are you aware that interest and penalties do not stop with an installment agreement/payment plan?  You can save money by paying the full amount you owe, as quickly as possible; to minimize the interest and penalties you will be charged.  Penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan.

Remember, the interest rate on a loan or credit card may be lower that the combination of penalties and interest imposed by the Internal Revenue Code.  It is best that you pay as much as possible before entering into an agreement.

If you owe $10,000 in taxes and you are considering entering into an installment agreement for 36 months, your payments could be as high as $339 per month including interest at the rate of 5% and failure to pay penalty of up to 1% each month.  Keep in mind that the 5% interest rate is based on the rates that have remained the same since May 2004.  These rates change periodically and may increase, so the taxpayer could end up paying even more.  In this situation, you could save $2,247 by paying all of the taxes now rather than entering into an installment agreement.  An installment agreement would cost a total of $12,204 in payments.  However, effective January 1, 2007, the new installment agreement user fee is $105 and $52 for agreements where payments are deducted directly from your bank account. Taxpayers with income at or below established levels, based on the Department of Health and Human Services poverty guidelines, can apply and be qualified to pay a reduced user fee of $43 for establishing new agreements, including agreements where payments are deducted directly from your bank account.

A Notice of Federal Tax Lien may also be filed against your property to secure the government’s interest against other creditors while the installment agreement is in effect.
 
A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card.  As demonstrated in the chart below, borrowing $10,000 over 36 months at various interest rates would result in less costly payment amounts as compared to an installment agreement:

Interest
Rate 

 Monthly
Payment

Months 

 Total Paid
to Lender

 Savings to
Taxpayer

7% 

$308.77 

36

$11,115.72 

$1,131.28 

9% 

$318.00 

 36

$11,448.00 

$ 799.00 

11% 

$327.39 

 36

$11,786.04 

$ 460.96 

13% 

$336.94 

36

$12,129.84 

$ 117.16 

A Notice of Federal Tax Lien would also be avoided, thereby maintaining your credit standing.  Additionally, the installment agreement fee would not apply.

Paying your taxes in full, or partially paying your tax liabilities through liquidating or borrowing against real estate or personal property (bank accounts, stocks, bonds, 401(k) plans, or life insurance), would cost less than an installment agreement.

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Tax FAQs - Tax FAQs -Tax FAQs -Tax FAQs -Tax FAQs
 


Why Should I File My Tax Return as Soon as Possible?

There are two advantages to filing as soon as possible:

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Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

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Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

What If I Owe More Than I Can Pay?

Even if a taxpayer doesn't have enough money to pay, returns should be filed to avoid further penalties for failure to file. The IRS will assist in finding a solution to the problem.

The IRS has streamlined its policies to offer alternative account resolutions if a taxpayer cannot pay in full with the return:

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The IRS will help to set up an installment agreement when the situation warrants. Installment payments allow taxpayers to pay the tax debt over time.

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The IRS will consider whether an offer in compromise is an appropriate solution.

What If I Don't File Voluntarily?

The IRS is taking enforcement steps for those who repeatedly choose not to comply with the law. IRS employees will prepare returns when taxpayers do not file. The returns prepared by the IRS might not give credit for deductions and exemptions a taxpayer may be entitled to receive. Bills will be sent to those taxpayers for the tax due, plus penalties and interest.

People who repeatedly don't comply with the law are subject to additional enforcement measures..

How Can I Avoid Owing Money on Next Year's Return?

Many people don't file tax returns because they don't have enough money to pay the tax they owe. They find out after completing their return that their withholding or Estimated Tax payments do not equal their tax liability.

To help avoid this situation, the IRS can advise taxpayers how to ask an employer to withhold enough tax from their pay. For any income that is not subject to withholding, the IRS can provide information necessary to make quarterly payments to cover any amount to be owed.

Changes in financial circumstances could have an impact on taxes. For example, an increase in income, divorce, or selling an asset, may require adjustments to withholding or estimated payments.

By taking these steps, taxpayers will be better able to meet their tax obligations and avoid tax day surprises.

Will I Go to Jail?

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

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