For most taxpayers, there is little question as to when they should file their income tax returns. The answer, of course, is as soon as possible, so that they can get their refunds from Uncle Sam and spend them. Of course, those who owe money at either the federal or state level are often in no hurry to notify their soon-to-be creditors of this pending debt by filing their returns. Many of them therefore wait to file their taxes by submitting a request for an extension with either the IRS or their state departments of revenue. But this is not always wise, and there are several factors to consider. Still, waiting to file your tax return can turn out to be a good idea in some cases.
Convenience or Necessity?
There are times when it is absolutely necessary to wait before filing your tax return, such as when you don’t have all of the information you need to file. This can happen when you’re involved with a complex business deal that will take time to finalize and report, or when you are waiting for tax information to be reported to you from another party, such as an employer that went bankrupt.
Another instance is when you have a dispute with someone about a transaction or payment; if a creditor such as a mortgage lender claims that they never received payments from you that you sent them, then they will not issue you the form you need to report those payments on your tax return.
In some cases, it may be wise to go ahead and file now so that you can get a partial refund (or pay what you owe) and then file an amended return later when you get the issue resolved.
If you choose to file an extension simply because you don’t feel like paying your taxes now, remember that you will pay a failure-to-pay penalty on the amount due. The IRS charges a half-percent per month on this amount every month up to 25% of the amount that you owe them. However, if you owe the IRS a substantial balance and are trying to qualify for a streamlined installment plan to pay off your taxes, you may be wise to hold off on filing if the additional amount that you will owe on your current return will put you over the streamlined agreement limit of $50,000. For example, if you currently owe $42,315 of principal to Uncle Sam and your accountant tells you that you will owe another ten grand this year, then you might be smart to file an extension now while you qualify for the streamlined agreement and then add on your current tax bill in the fall when you’ve had a chance to pay down your balance somewhat.
Don’t Fail to File
Whatever you do, don’t put off filing your returns altogether. If you know that you owe a material sum to the IRS, then your failure to file will be viewed as fraud and can land you in jail. But there is no such punishment for those who file their returns and do not pay what they owe. However, delinquent taxpayers can face interest and penalties, liens, levies and garnishments and a lower credit score. For more information on paying and filing your taxes, log on to the IRS website at www.irs.gov or consult your tax advisor.