2016 Tax Filing Deadline is Fast Approaching-What to do if you cannot pay the balance owed?!?!
The deadline for filing your 2016 Individual Income Tax return this year is April 18, 2017. Generally your return is due on the 15th day of the fourth month of the year (April 15th). However, this year the 15th falls on a Saturday, which would generally push the filing date back to the following Monday (April 17th). With the way the dates fall this year, Washington D.C. Emancipation Day will be recognized on April 17th, pushing the return filing due date back to April 18, 2017.
There are many important things to know about the return filing deadline. First and foremost, this is the date that your return must be filed and paid (if a balance is owed). Failure to timely file and pay your return can result in multiple issues, including interest and penalties being assessed by the IRS and State of Michigan, default of any previously established resolution, and potential issues getting a loan or applying for financial aid.
When a return is filed late, the IRS will assess a failure to file penalty. This penalty can be up to 25% of your unpaid taxes on your return. If your return is filed more than 60 days after the filing due date, the minimum payment is either $205.00 (adjusted for inflation) or the full amount of the tax due, whichever is less. If you do not pay the tax owed by the due date, the IRS will assess a failure to pay penalty against the return in the amount of one-half of one percent of the unpaid tax, up to 25% of the tax owed. As the failure to pay tax is less than the failure to file penalty, it is better to still timely file your return and pay as much of the balance as you can, even if you are not able to pay the full amount owed. Click here to see more information regarding these penalties on the IRS website.
You also have the option to file an extension with the IRS. In order to file an extension, a taxpayer needs to complete and send Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return to the IRS by the original return filing deadline of April 18, 2017. Filing this extension grants an additional six months to the original filing deadline. It is important to note that although the extension extends the FILING deadline, it DOES NOT extend the PAYMENT deadline. When completing the form, the taxpayer has to estimate their total tax liability for the 2016 tax year. They then have to deduct any payments made to determine a tax due and list out the amount that they are sending in with Form 4868. Failure to pay the tax owed will result in penalties accruing from the original due date of the return. The IRS will also assess interest on the unpaid tax from the original filing date.
Another issue with not filing and paying your return on time is that it can default any previously established resolution with the IRS. Say for instance, you owed $10,000 in back taxes with the IRS. Because you were unable to pay the tax owed, you requested a payment plan with the IRS. If you then fail to file by the due date, or if there is a balance owed on your return that you do not timely pay, the IRS can default your previous installment agreement. Furthermore, the IRS generally will not just add a new balance to an established installment agreement. Instead, they will default the agreement and you will have to go through the whole process of re-establishing the agreement again. Once your resolution has defaulted, the IRS may be able to enforce collections against you, up to and including bank levies and wage garnishments. Therefore, it is important that you satisfy the terms of any established IRS resolution by timely filing and paying your current year tax return.
We have seen situations where a client has set-up an installment agreement on previous tax balances. However, they are then unable to pay their current year tax obligations because they are trying to keep-up with the back taxes. They then end up owing for the current year and defaulting their previous installment agreement. This can be a very frustrating situation. As they try to pay the amount they owe, they just seem to end up in a worse position when they then owe again, plus additional interest and penalties keep accruing on both the old and new balances. Do not let yourself get caught in this cycle. If you have a tax balance that you are unable to pay, or if you are unable to meet your current installment agreement payments, we recommend that you contact our office, or that of another tax professional, to discuss what other options and IRS programs are available to help you resolve you tax liabilities. Many options exist currently to establish resolution with the IRS on these back balances, which is why it is very important to contact a tax professional if you owe a large amount of tax you are currently unable to pay.
Some of the possible resolution options offered by the IRS include: the Offer in Compromise program, establishing an Installment Agreement, or requesting a Currently Non-Collectable status. While some of these programs require a detailed analysis of your financial position and many hours of negotiation with the IRS, a qualified resolution firm can verify which of these programs you would be a good candidate for. The Offer in Compromise program allows a qualifying individual to negotiate with the IRS to settle out their entire tax balance. This is a very cumbersome, time-sensitive process, which, if done correctly, can save thousands (hundreds of thousands if a high enough tax balance) of dollars owed and actually paid to the IRS. In return for compromising your tax liability, the IRS will require you to 1) full-pay your settlement amount, usually within 5 months of acceptance, 2) timely file all returns for the next 5 years with no balance due, 3) pay your current year taxes through proper withholding or estimated tax payments. The IRS also offers Currently Non-Collectable status to taxpayers’ accounts if you qualify based on your financial information. Although this is not a permanent resolution of your tax balance due, the IRS will temporarily allow your account to sit dormant and not proceed forward with collection actions. They will review your account for any changes and may request additional support of your financial information at any time to verify you still qualify for this resolution option. Lastly, the IRS will allow you to set up an installment agreement on your account. The type of agreement they will allow will depend on the tax balance you currently owe as well as you financial condition. This is why it is important to meet with a qualified professional as they will be able to advise you on the best method to proceed forward with taking care of these balances and becoming current with your taxes so you do not get trapped in the cycle of never being able to pay enough money toward your tax balance to fully pay it off or accruing new liabilities.
Even if you do not owe tax balances, failure to file and pay your tax returns on time can result in other issues, including being unable to get loans or qualify for financial aid. Generally, banks and other lending institutions want to see your tax returns or your return transcripts to verify your income. When these returns are unfiled, it can slow down the process, or prevent funding from being available. Some professional licenses also require that your returns are filed and paid in full.
Feel free to contact us regarding any questions on the current IRS return filing deadlines or if you need help resolving your tax liability.