SKIP: It is that time of year again – tax time – and you have a few things for us to think about, correct?
MELLODY: That’s right, Skip. Wednesday is April 15, a day everyone knows but one that can cause anxiety and stress if you are uncertain about things or if you haven’t prepared. So this morning, I want to talk about a few things to remember if you haven’t yet filed or are not sure how you are going to pay. I want to make sure that everyone avoids penalties or any other mistakes!
SKIP: That sounds great. First things first: what do you need to know if you can’t pay?
MELLODY: The most important thing to remember is that even if you cannot pay, you still have to file taxes. Anyone can file for an extension, but you still have to submit the paperwork, which is due on April 15. By filling out IRS form 4868, the IRS will allow you another 6 months to finish. You just have to make sure that you submit your taxes before October 15. If you want to do this, you can file for a free extension through IRS Free File.
I cannot reiterate this enough though, Skip: you have to file. Failing to file your taxes is a very big deal. If you simply ignore tax day and don’t file or apply for an extension because you cannot pay, the IRS will charge you a failure-to-file penalty, which is usually 5% of the unpaid taxes for each month your return is late, up to 25% of your bill.
SKIP: Alright, so make sure you file. And what about the money though?
There are a number of options here. If you request an extension because don’t have the money necessary to pay, file your taxes and pay as much as you can afford. If you do this, and you only need a little time to come up with the rest, you can request a short extension of 60 to 120 days. You will be charged penalties and interest, but at a lower rate than you would if you are outstanding, and or file late.
If you cannot come up with the amount owed in under 4 months, the IRS also offers installment plans. This requires you to pay a fee to sign up the program, but will allow you to pay a certain amount each month. The IRS has approve the plan, and you still have to completely pay off the amount owed within 3 years.
Finally, you should know that if you are owed a refund, you won’t be penalized for not filing. However, Uncle Same will not send you your refund until you file your taxes. And if you keep missing tax day, you won’t get your refund back, period. If you ignore April 15 for three straight years, the IRS will keep your money.
SKIP: Are there any surprises in store for those who haven’t filed yet?
Some people might be surprised by the impact of some of the new provisions in the Affordable Care Act. A recent study came out estimating that half of the individuals who receive healthcare coverage through ACA exchanges are expected to owe the IRS money. The reason?
Because the ACA subsidy system requires customers to estimate their income for the upcoming year, those who end up earning more than expected will end up getting more subsidies than appropriate. The report estimated that 50% of enrollees will owe $794 on average, according to a new study. However, on the positive side, 45% are expected to have overestimated their income and should get extra money back from the government, for an average refund of $773.
SKIP: OK. Let’s hope we estimated conservatively! Anything else we need to know?
MELLODY: Just remember to keep copies of all of your tax documents. It can help you in the coming years. This is important, as the IRS is allowed to audit your return for up to three years from your filing date, or more if they suspect problems were intentional. Keeping your records for 7 years is a safe time period. Tax court is one of the few places where failure to report proof of claims results in an assumption of guilt. So, the burden of producing justification rests on you, so its always better have your documentation in order, just in case!
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news.