Late On Taxes? There's A Way Out
CELESTE HEADLEE, HOST:
I'm Celeste Headlee and this is TELL ME MORE from NPR News. For those of you procrastinators, today at midnight is the deadline to file your taxes. But if you've been putting it off, you may not have to rush around to get it done tonight. You could file for an extension. Here to give us insight on how the whole thing works is Kevin McCormally of Kiplinger's Personal Finance magazine. Welcome back.
KEVIN MCCORMALLY: Thank you.
HEADLEE: So you have by midnight tonight not only to file your taxes but also to file for an extension, correct?
MCCORMALLY: And if you want to know the big secret - 75 percent of taxpayers don't have to do anything by midnight tonight because the penalty for failing to file for that extension is a percent of the amount of money you owe on your tax return. And since 75 percent of us get big refunds, there's no penalty for being late. Now, there are a few people who make arcane elections on the return that have to file for the extension. But for most of us, it doesn't matter. But let's talk about how to do the extension.
HEADLEE: That's right because if you - I mean, you have to be very certain you don't owe anything because if you don't pay, you're supposed to pay by tonight even if you don't file, correct?
MCCORMALLY: That's right. That's the reason if you all money you have to file for that extension. So if you want to get it done and make the IRS happy and file that extension, it's really easy to do. You don't even have to go to the post office anymore, you can do it online. IRS.gov has a thing they call Free File and anybody can use it - free fillable forms.
I just did it right before I came over. I fired up my computer and I filed for an extension for my mother whose return I do. It took me five minutes - her name and address, how much money we think she owes for 2013, how much money she paid through withholding on her IRA distributions, how much we owed, hit the return, you're done. You can either print it out and send a check to the IRS or you can actually pay online with a credit card or debit card or direct payment from your...
HEADLEE: Take it out of your account.
MCCORMALLY: ...Your checking account. It's really easy.
HEADLEE: What are the justifiable reasons for filing an extension? Do you have to have a good reason?
MCCORMALLY: None whatsoever. Any reason at all, you just ask for it, they have to give it to you as long as you pay what the extension requests. Now, if the estimate of how much you owe is unreasonable the IRS can deny the request ex post facto and charge you with the penalties for failure to file.
I had a friend yesterday - said, well, what's reasonable. And I said, well, you know, if you owe $1,000 and you pay them $500, that's reasonable - if you owe $10,000 and you pay them $500, they probably would decide that's unreasonable. It's a facts and circumstances issue. It's up to you. You know, you need to try to estimate, but if you come within 90 percent of what you actually owe - no penalty.
HEADLEE: OK, so let's say I file an extension. How long do I have then to file my taxes?
MCCORMALLY: That buys you six months until October 15. Get it done by then, and you're fine.
HEADLEE: I want to be clear, though, let's say I owe money, and I pay a reasonable amount - I still have six months to file...
HEADLEE: ...Or I'm supposed to be paying on my debt?
MCCORMALLY: No. No. Celeste, you've put that in, you're sending your reasonable estimate of what you owe and you've got six months to file. The key thing is to file something by midnight tonight if you owe money because there are two panels the IRS can assess - a failure-to-pay penalty - if you don't pay enough - that's one half of what you owe, one half of a percent per month.
The failure-to-file is 10 times as much is that - it's 5 percent a month. So if you owe a thousand dollars and don't file at all, it's $50 a month penalty. If you file, even if you don't pay a nickel, it's $5 a month penalty. So that's the reason you want to file that extension even if you can't pay. And we say that same thing to people who've done their returns, but they get it all done and they say, my God, I haven't got $750 to send the government. Send your return in anyway, even if you can't pay a penny, pay what you can.
But even if you can't pay anything, send it in. The IRS will send you a bill, but it will protect you from the failure-to-file penalty, and that's the big one.
HEADLEE: Most people don't owe any money, though, right? Most people are owed a refund from the government.
HEADLEE: At that point, do you get a failure-to-file penalty?
MCCORMALLY: No, the government, believe it or not, doesn't care if it owes you money. In fact, as of midnight tonight...
HEADLEE: I believe that actually.
MCCORMALLY: You know, the IRS puts out a press release in mid-March every year saying how much money taxpayers are about to lose because they never filed their return three years ago. And right now we're talking about the 2010 returns. The right to ask for a refund that you should've asked for with a 2010 return expires at midnight tonight.
And the IRS has over $750 million of refunds that it knows it owes people because it got withholding and nobody asked for it back because they never filed a return. Maybe they didn't think they had to file, I think a lot of them are scared to file 'cause they get to be late and they don't realize that if they have money coming back there's no penalty. But as of midnight tonight, those 2010 returns, $750 million just goes into the government's coffers not back to the taxpayers.
HEADLEE: It's kind of like finding a wallet and just keeping it.
MCCORMALLY: It sort of is except they really do go out of their way trying to - a lot of press releases, they break it down by state - how many people in New Jersey have money owed to them, how many people in Iowa, how many people in Tennessee. It comes down, they put it out.
The media talks about this a lot, but mainly we're talking probably about people who have refunds coming because they earned income tax credit, people who don't understand the tax law, and people who really want to be underground and they don't understand that their employer was withholding taxes, they didn't really own anything. They should get that money back.
HEADLEE: We have been hearing news about people who didn't get a tax refund although they were expecting it because, for one reason or another, the government grabbed that money. What are the circumstances under which the government can keep your tax refund?
MCCORMALLY: OK, well, there are several of them. The big thing in the news lately - the scandal - a great story by The Washington Post discovered that a bill signed into law in 2008 lifted the 10 year statute of limitations for how long the government can go after debts from taxpayers by grabbing their tax refund.
And so some people at the Social Security Administration - and nobody knows who it was - decided to start going after some really old debts. And in fact, they were going after children for debts of their parents, where their parents were overpaid Social Security benefits. Well, the case in the Post - the most egregious example - was a 50-year-old debt and they went after the daughter for it and they took her tax refund. But as of yesterday, Social Security said, oh, gee, we don't mean to do that.
MCCORMALLY: Yeah, yeah. There was a lot of hell raised on Capitol Hill, and they stopped it. But if you owe child support they can take your refund and give it to your ex-spouse. If you have debts on student loans they can grab your refund and pay off that debt.
And coming next year - Celeste, this is going to be a big issue because the only way the IRS has to enforce the Obamacare penalty for people who don't buy insurance is to take their tax refund. This is going to be a huge issue next year. Social Security is safe for now, everybody who doesn't get insurance is going to be in trouble next year.
HEADLEE: One last quick question. Is it true that if you file late, you're more likely to get audited?
MCCORMALLY: I don't believe it is true.
HEADLEE: It's a myth.
MCCORMALLY: There are some people who say you shouldn't file an extension. Some people say you should file an extension because then they have less time to audit your return. But they're not going to audit this year's returns for a year and a half. So whenever they get in there, if the computer smells something bad about your return, they're going to send you a letter.
HEADLEE: Kevin McCormally is editorial director of Kiplinger's Personal Finance magazine. He joined us here in our Washington, D.C. studios. Thanks so much.
MCCORMALLY: Thank you.