There are some important tax issues everyone should consider and understand as Tax Day approaches.
First, the normal April 15 deadline to file personal income tax returns has been extended to April 17, because April 15 falls on a Sunday and April 16 falls on the Emancipation Day holiday in the District of Columbia.
Here are some other helpful tips:
Extension to file: Individuals use Internal Revenue Service Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, if they are not able to file their tax return by its regular due date. By filing the application for automatic extension of time to file, the deadline is automatically extended until Oct. 15. An extension to file a tax return is just that, an extension to file the tax return. It is not an extension to pay taxes. Pursuant to the Internal Revenue Code, if a taxpayer is going to owe taxes when they eventually file a return, they are supposed to pay that amount with the filing of the extension. Failure to pay with the extension can result in penalties for failure to pay, which is equal to one half of 1 percent per month.
Additionally, by failing to pay the taxes owing by the April 17 deadline the taxpayer could possibly invalidate an extension to file resulting in a failure to file penalty, which is equal to 5 percent of the taxes owing per month for a maximum of 25 percent. This failure to file penalty will be in addition to the failure to pay penalty and both will accrue interest.
Accordingly, if a taxpayer is going to submit an application for automatic extension of time to file a tax return, the taxpayer should make sure they have properly estimated the taxes they will owe and submit that amount with Form 4868.
Mailing of tax return: The postmark on the envelope when mailing a tax return is deemed the date the return was filed. However, the IRS does not retain the envelope when a taxpayer mails a return. If there is ever a question of if or when you filed your tax return, the burden of proof is on the taxpayer to prove they filed their return timely. I recommend any filing with a taxing agency be sent certified mail with a return receipt requested to show the date it was filed and received by the government.
Review of tax return: When filing a federal income tax return using Form 1040, there is a statement the taxpayer makes when signing the return, which provides that “(U)nder penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” This statement forms the basis for prosecution by the U.S. Department of Justice if fraud is suspected on a tax return. It is each taxpayer’s responsibility to review their tax return for accuracy, especially if a paid preparer has prepared the return for them. Return preparers are under a tremendous amount of pressure this time of year with their workload and they sometimes make mistakes. A taxpayer could be held liable for a return preparer’s mistake and be subject to penalties and interest. Accordingly, review the accuracy of your return.
Proof of cash: In the majority of audits the IRS will request copies of bank statements to ascertain if there is any unreported income. Essentially, the IRS will compare all deposits against the amounts claimed as income on a tax return. If there are deposits to a bank account that are not reflected on a tax return, the IRS will presume the taxpayer has unreported income. To overcome this assumption, a taxpayer will need to show why such deposits are nontaxable. Accordingly, it is prudent to review the total income reported on a tax return against total deposits to a bank account and note on bank statements why such a deposit was nontaxable as taxpayer may forget two years later when the audit actually occurs. This simple proof of cash is a good practice to help a taxpayer ascertain whether or not they have reported all of their income.
Form 1040, Schedule B: On Form 1040 Schedule B, Interest and Ordinary Dividends, there is a question in Part III, which asks if a taxpayer has an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account. There is also a question about whether a taxpayer received a distribution from, or was the grantor of, or transferor to a foreign trust.
There is nothing illegal about having a foreign bank account or trust from an income tax perspective so long as the income from those sources is reported on an income tax return. These questions are listed to ascertain whether or not such items are disclosed and to provide the IRS a heavy hammer in case a taxpayer fails to report such items, i.e. through the penalties of perjury statement.
If a taxpayer does have an account in a foreign country, they may be required to file Form TD F 90-22.1. A taxpayer is required to file Form TD F 90-22.1 if at any time during the tax year the aggregate value of all foreign accounts exceeds $10,000. Pursuant to 31 USCS §5322, failure to file Form TD F 90-22.1 could result in a fine of not more than $250,000 or imprisonment for not more than five years, or both, if it is determined that a taxpayer willfully violated the requirement to file the form. This penalty would be in addition to any other applicable penalties that could result from failing to report income from a foreign source. If a taxpayer has failed to report income from a foreign source in the past, they should consult a tax attorney to ascertain how they should go about correcting that mistake.
Filing of tax return: Many times when I meet with a taxpayer who is in financial difficulties they tell me they did not file their income tax return, because they did not have the money to pay the taxes they owed. In many cases, these individuals have only compounded their problem by failing to file their return for at least four reasons.
First, they have increased the amounts they owe because of the failure to file penalty, which is a maximum of 25 percent of the taxes owed plus interest.
Second, it will be difficult to negotiate with the taxing agency until the taxpayer is in compliance, which means preparing and filing the past returns.
Third, the statute of limitations for the IRS to collect a tax debt is 10 years from the date of filing the return. Thus, if the returns were never filed, the statute of limitations never started to run.
Lastly, if bankruptcy is the last option or alternative for the taxpayer, the income taxes will only be eligible to be discharged if the taxes have been assessed for three years on a timely filed return or two years on a delinquent return. If the return was not filed, the taxpayer will have to wait a minimum of two years from the date of assessment to have those taxes discharged in bankruptcy. Accordingly, it is always prudent to file your tax return even if you cannot currently afford to pay the balance owing.
IRS Fresh Start program: The Fresh Start Relief Initiative provides eligible taxpayers with a six month extension of time to fully pay 2011 taxes. Interest will run on the 2011 taxes from April 15 until the tax is paid, but no failure to pay penalties will be incurred if tax, interest and any other penalties are paid in full by Oct. 15.
For a taxpayer to be eligible for this program, they must owe less than $50,000, have an adjusted gross income of less than $200,000 (if married filing jointly), and must be a wage earner who has been unemployed for at least 30 consecutive days between Jan. 1, 2011 and April 15, 2012, or self-employed whose 2011 business income decreased 25 percent or more due to the economy.
A taxpayer meeting those requirements must complete and mail Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Hardship, by April 17, 2012.
New scam warning: Recently the IRS warned of a new scam being run this tax season. The scheme carries the common theme of promising refunds to people who have little or no income and normally do not have a tax filing requirement. Under the scheme, promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled or paying for college. The IRS advises that taxpayers visit its website to get the facts on tax benefits related to education and search for “Tax Benefits for Education Information Center.”
As always, if you have any questions regarding a tax issue, please consult your local tax attorney or certified public accountant. Please note that pursuant to IRS Circular 230, the written advice provided in this article was not intended and cannot be used as a basis for avoiding the assessment of any tax penalty.