IRS - Forgot to Pay Federal Taxes

[te5486a]

Long story short. My buddy has not paid federal taxes during the entire year on his income. He either forgot to check a box or their was a computer glitch. He expects to owe approximately $10k and expects to receive a minimal state refund. What is his best course of action? He's concerned about interest/penalties.

Thanks in advance,

Tim

[te5486a]

Can an Admin please move this to the Personanl Finance Sub-forum? Thank you.

[jebmke]

At this point, he can e-file (starting tomorrow, I think). Might as well just file quickly, pay the taxes, penalty and any interest.

[Boglenaut]

Wow, this ranks right up their where in college I would dream I signed up for a course and forgot to attend all semester until the final.

I wish him luck.

[jebmke]

Wow, this ranks right up their where in college I would dream I signed up for a course and forgot to attend all semester until the final.

I wish him luck.

yes, the ubiquitous "exam dream" that haunts people forever.

[justus]

He should file ASAP even if he can't pay the whole amount, he should send what he can until he's caught up.

[bkslainte]

Yes, file and pay the taxes ASAP. And make sure that computer glitch gets fixed for next year. lol

[22twain]

yes, the ubiquitous "exam dream" that haunts people forever.

Except for teachers and professors, in which case the dream is about the class they were supposed to be teaching but forgot about all semester.

[ddb]

Long story short. My buddy has not paid federal taxes during the entire year on his income. He either forgot to check a box or their was a computer glitch. He expects to owe approximately $10k and expects to receive a minimal state refund. What is his best course of action? He's concerned about interest/penalties.

Thanks in advance,

Tim

Not too big a deal. Just file and pay what's owed. There will be a penalty for underwithholding, but it's minimal. The tax software I use calculates the penalty on a $10K income tax liability as around $200.

- DDB

[Breezy]

I believe the penalty is 5% for late payments on estimated quarterly payments.

I recommend that he send in a chunk of money today, and that way, at least the interest stops accruing. (I'm assuming he can't file today - probably needs to work through some things), but he can still get a payment sent in. If he thinks he owes $10K, that's what he should send in.

He should study retirement plans for the self-employed, and perhaps he can put some money in a retirement plan, which he then would not owe tax on this year -- BUT, he should send some money in now, do his taxes, and move forward from there. If he ends up overpaying, he'll get the overpayment back.

[MBMiner]

You don't even need to file promptly. Just send in a check for the estimated tax due.
Bruce

[hq38sq43]

Long story short. My buddy has not paid federal taxes during the entire year on his income. He either forgot to check a box or their was a computer glitch. He expects to owe approximately $10k and expects to receive a minimal state refund. What is his best course of action? He's concerned about interest/penalties.

Thanks in advance,

Tim

Your buddy is roughly in the position of someone who has run up a $10K balance on a very low interest rate (3%) credit card issued by the government. The so-called Estimated Tax Penalty is computed quarter by quarter on the accumulated unpaid balance at the end of each quarter and then totaled for the penalty due for the year. The advice for him to file and pay what he can asap is very sound. If he can't pay the full amount due, he should request, and IRS will almost certainly agree to, a reasonable installment payment plan. Unfortunately, some folks are so petrified by the prospect of a penalty, even one as modest as the Estimated Tax Penalty, that they dither and/or do nothing and wind up in unnecessary deep trouble. Please do what you can to see that your buddy does not go that route.

Best regards,

[sscritic]

Without filing his return, he can make the fourth estimated tax payment due January 15 15 days late. I think 1/4 of that will probably be considered late from April 17, 1/4 late from June 15, and 1/4 late from Sept 17. By having the due dates fall on the 17th for two of the quarters, he has already saved 4 days worth of interest on the 1/4 payments. I guess that means he saved one day's worth overall.

[te5486a]

Thank you all for the posts. I forwarded this thread to my buddy, and he was very appreciative!

[MN Finance]

If memory serves the penalty for not paying is 0.5% per month (with no cap) but the penalty for not filing is 5% per month (I think maybe there's a cap), so they mostly want the money

[bottlecap]

Thank you all for the posts. I forwarded this thread to my buddy, and he was very appreciative!

Come on.. This is supposed to be the part where you fess up and admit it's you...

JT

[SSSS]

There will be a penalty for underwithholding, but it's minimal.
...
around $200.

Quite a generous definition of "minimal".

[sscritic]

There will be a penalty for underwithholding, but it's minimal.
...
around $200.

Quite a generous definition of "minimal".

What is that as a fraction of $10,000? I can't find my calculator and my brain stopped working.

[Oicuryy]

He's concerned about interest/penalties.

See IRS Form 2210.
http://www.irs.gov/pub/irs-pdf/f2210.pdf
http://www.irs.gov/pub/irs-pdf/i2210.pdf

Ron

[LadyGeek]

Can an Admin please move this to the Personanl Finance Sub-forum? Thank you.

You got it. We can get to your request sooner by using the report post "!" in the upper right corner of every post. One of the reasons is for "Wrong forum."

[fareastwarriors]

You don't even need to file promptly. Just send in a check for the estimated tax due.
Bruce

When the person sends in the check, does he need other paperwork? Does he write in SS# in the memo section?

[sscritic]

When the person sends in the check, does he need other paperwork? Does he write in SS# in the memo section?

When you make an estimated payment it is a good idea to use the voucher for an estimated payment. The vouchers for 2012 are at the end of Form 1040ES.
http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Hurry before they replace this with the 2013 version.

File only if you are making a payment of estimated tax by check or money order. Mail this voucher with your check or money order payable to “United States Treasury.” Write your social security number and “2012 Form 1040-ES” on your check or money order. Do not send cash. Enclose, but do not staple or attach, your payment with this voucher.

There are these modern internet ways of paying, but I don't use them.

[Calm Man]

Wow, this ranks right up their where in college I would dream I signed up for a course and forgot to attend all semester until the final.

I wish him luck.

Although I am almost 40 years from college, this raises a recurring dream I have. I am in college and I keep saying I don't know my class schedule (I guess we used to write it down then) and can only tick off 3 classes I am going to and don't remember the 4th or 5th and figure maybe there are no classes for them. Then I wak up usually.

[spotty_dog]

I inherited the role of treasurer for a small nonprofit that hadn't been paying employment taxes. That was a bit of a bigger deal, because we were withholding from the employee but not depositing, and the IRS takes that failure of trust VERY seriously. On advice from the IRS (you have to wait a long time to talk to anyone, but they are quite helpful once you get through) I just went ahead and paid each quarter's tax separately, as if it were on time, with the ordinary vouchers. The IRS was very prompt to react to the lateness of the payments and to issue an invoice for the penalties and fees. As noted, each late payment had its own penalty rate associated with it. The sooner you get the payment in, the sooner you stop the clock on interest continuing to accrue. I'd call the IRS but I'd assume the advice is the same.

[MarkNYC]

Without any tax paid, a $200 underpayment penalty on $10,000 total tax sounds about right. If a late 4th quarter payment is mailed today, it might reduce the penalty by 20%-25%. However, a payment mailed today that was due Jan 15th will be more than 2 weeks late. When a tax payment is mailed after the due date, any applicable interest or penalty is not based on the payment mailing date, it is based on the date the IRS eventually credits the payment to the taxpayer's account, which can easily be 10 or more days after mailing.

Also, if $10,000 is the total tax, the maximum that needs to be paid in estimated tax is 90% of the total tax, or $9,000 - the remaining $1,000 can be paid by April 15th. Any estimated payment in excess of $9,000 will have no effect on the amount of the penalty. And if the 2011 federal tax was less than $9,000, say for example $6,000, then $6,000 is the maximum that needs to be paid in 2012 estimated tax - any estimated payment in excess of $6,000 will not affect the amount of the penalty.

[NAVigator]

I see that the responses all assume that he must pay quarterly estimated taxes. I am now retired and I never even knew what "estimated taxes" were for or to whom it applied. So, I looked it up and it seems that it is for self-employed people or freelancers. I have never been self-employed nor do I even know anyone who is. Then I reread the OP again. What is it that makes you assume the buddy in question is self-employed? Just curious.

Jerry

[jared]

I see that the responses all assume that he must pay quarterly estimated taxes. I am now retired and I never even knew what "estimated taxes" were for or to whom it applied. So, I looked it up and it seems that it is for self-employed people or freelancers. I have never been self-employed nor do I even know anyone who is. Then I reread the OP again. What is it that makes you assume the buddy in question is self-employed? Just curious.

Jerry

Estimated taxes aren't necessarily for self-employed. Estimated tax payments are made to pay tax on income that isn't subject to withholding or when the amount withheld won't be enough. It just so happens that self-employed people usually fall into this category.

[sscritic]

I am retired and get a two small pensions from Illinois (plus other income). They don't withhold any CA tax and they withhold very little federal tax as they both assume that they are the only income I am getting (withholding tables sort of work that way). When you have multiple sources of income, they don't all know about each other, and with a progressive tax system, the tax on a + b + c + d is more than the tax on a + tax on b + tax on c + tax on d. Four separate withholdings is never enough.

My income is stable enough that I switched to fixed dollar withholding on my main pension a few years back to avoid making the estimated payments that I used to make.

[southerndoc]

I believe the penalty is 5% for late payments on estimated quarterly payments.

I recommend that he send in a chunk of money today, and that way, at least the interest stops accruing. (I'm assuming he can't file today - probably needs to work through some things), but he can still get a payment sent in. If he thinks he owes $10K, that's what he should send in.

He should study retirement plans for the self-employed, and perhaps he can put some money in a retirement plan, which he then would not owe tax on this year -- BUT, he should send some money in now, do his taxes, and move forward from there. If he ends up overpaying, he'll get the overpayment back.

There is no late payment penalty for quarterly taxes. The IRS only charges a marginal interest rate (3% I think was the last figure I saw). I went an entire year without making a single quarterly payment and my total "penalty" (actually only interest) wasn't 5%.

[Bengineer]

Off-topic follow-up, apologies.

Wow, this ranks right up their (sic) where in college I would dream I signed up for a course and forgot to attend all semester until the final. ...

Who knew this was a common outcome of the "college experience"? Mine is similar, but I signed up and then didn't go to most of the classes due to one lame excuse or another and now it is exam time and I am going to fail. And everyone will know and my picture is going to be up on the wall-o-shame. It's been 30+ years since I started undergraduate and it still pops up every so often for cryin' out loud!

[sscritic]

Each period has its own interest rate. For 2012, they are all 3.0%. Note that 2012 was a leap year, so you get to divide by 366 for the first three periods.

See the instructions to Form 2210, Penalty Worksheet, page 7, e.g.,

Code: Select all

Underpayment            Number of days
                          on line 6       
on line 1a      ×          -------     ×     .03
                             366

[hoppy08520]

Wow, this ranks right up their where in college I would dream I signed up for a course and forgot to attend all semester until the final.

I wish him luck.

yes, the ubiquitous "exam dream" that haunts people forever.

Off-topic follow-up, apologies.

Wow, this ranks right up their (sic) where in college I would dream I signed up for a course and forgot to attend all semester until the final. ...

Who knew this was a common outcome of the "college experience"? Mine is similar, but I signed up and then didn't go to most of the classes due to one lame excuse or another and now it is exam time and I am going to fail. And everyone will know and my picture is going to be up on the wall-o-shame. It's been 30+ years since I started undergraduate and it still pops up every so often for cryin' out loud!

Wow, I thought I was the only one with that dream/nightmare. My variation is that I realize that I'm signed up for the course right after the deadline passes where you can still withdraw without getting a "withdraw-failing" on your transcript. I still have this dream from time to time, 20+ years after graduating college. I've never talked about this to anyone else, but here I am on a personal finance website and find three others with the same recurring nightmare.

OP, sorry for the off-topic post.

[LadyGeek]

Please stay on topic...

[NAVigator]

Wow, I thought I was the only one with that dream/nightmare. My variation is that I realize that I'm signed up for the course right after the deadline passes where you can still withdraw without getting a "withdraw-failing" on your transcript. I still have this dream from time to time, 20+ years after graduating college. I've never talked about this to anyone else, but here I am on a personal finance website and find three others with the same recurring nightmare.

I suppose you thought your were in a class by yourself.

Jerry

[LadyGeek]

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