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FILING ON TIME: WHY BOTHER?

April 02, 2003

Like other good habits, filing tax returns on time is second nature to most people. While it may not be as much fun as, say, flossing, the practice of safe tax has obvious benefits for mental, if not dental, health.

But, just as some scoff at flossing, others look sceptically on tax deadlines. In the interest of promoting good tax hygiene, we will discuss some of the benefits of timely filing.

NON-FILING IS USUALLY EXPENSIVE!

Failing to file a tax return is costly in two ways. First, if the IRS owes you money, they keep it if you don't file a return. In this case, failure to file constitutes a voluntary penalty of 100% of your refund.

Second, if you owe them money, they will hit you with penalties for non-filing.

THE FAILURE TO FILE PENALTY applies when a return is not filed on time AND there is a balance due. The penalty is 5% per month, up to a maximum of 25% of the amount due. If you are even one day late, they slap on the first 5%. Interest also applies to the unpaid balance and penalties.

THE FAILURE TO PAY PENALTY, by contrast, is only .5% (1/2%) per month, plus interest on the unpaid amount. The arithmetic here is compelling. If you can't pay your taxes, you can save a lot of money by filing a proper return or extension, even if you can't attach a check.

For example, a taxpayer owing $10,000 on April 15 who needs an extra month to come up with the cash will owe an extra $50 penalty (plus interest on $10,000 for one month at 6%) if she extends her return and pays the tax by May 15. If she skips the extension and files a late return by May 15, she owes an extra $500, plus interest.

FRAUDULENT FAILURE TO FILE is much more serious. This penalty applies to taxpayers who are hiding something. It also applies to those who have, for some reason, decided the tax law doesn't apply to them, or who just decide to "blow it off" year after year. Finally, it can apply to those who simply should know better - accountants and attorneys, for example, but not necessarily actors or journalists. This penalty is 15% per month, to a maximum of 75% of the amount owed.

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