Who: Small Business Owners, Self Employed Individuals, and Independent Contractors

Individuals who end up owing the IRS money tend to have the same situations occur. One of the monumental reasons taxpayers owe IRS tax debts is not adhering to the pay as you go requirements for tax payments to the IRS. The IRS does not want to wait until the following year to collect tax revenue, so if you do not pay as you go, the IRS will assess additional penalties and interest to your tax liability. The pay as you go requirement is met in primarily one of two ways. The first and most common is through federal tax withholdings from an employee’s paycheck. While the second is remitting estimated tax payments periodically to the IRS. Taxpayers who earn income not subject to withholdings for payroll and income taxes are required to remit estimated tax payments on 4/15, 6/15, 9/15, and 1/15 of the following year and any balance owed must be paid by the following year’s 4/15 due date. Otherwise, the IRS will assess a penalty for not remitting estimated tax payments during the course of the year. However, a second issue arises because of the confusion of what it means to file an extension.

An IRS tax return is due periodically (quarterly, yearly, etc.) The IRS Form 1040, The U.S. Individual Income Tax Return, is due yearly. The deadline to file the tax return is usually April 15 of the following year. So, a taxpayer would file his or her Form 1040 for the 2017 tax year on April 15, 2018, unless the taxpayer extended the time to file the return which is six months and usually October 15. This extension is for filing the return later but is never for paying the taxes due later.

The reason the IRS offers taxpayers the ability to file an extension is because the taxpayers do not always have all the information to adequately and completely submit a tax return by the due date. Now, many people happen to “kick the can down the road” and even if they may have all the necessary information, choose to file an extension. That is ok. However, those who end up owing back taxes fail to have their tax professional prepare a conservative tax projection and remit the balanced owed by the 4/15 deadline for payment. The taxpayers who end up in trouble either ignore the responsibility of paying by 4/15 or believe that their extension is also an extension to pay later. That is not the case. So, these taxpayers end up paying a penalty known as the late payment penalty. This penalty is in addition to the estimated tax penalty previously mentioned. So, now a taxpayer who is already behind on paying the IRS has to additional money in the form of penalties and interest.

Finally, the taxpayers who end up not filing returns or extensions timely, not paying as they go, and not paying by the due date end up with the worst situation. Most of the time the taxpayer thinks that since they already missed one requirement, then they just want to ignore the whole situation and resolve it later all at once. This is a bad plan. Just because you make one mistake does not mean you should perpetuate the mistake. Taxpayers often think that they will resolve it all later at some point in the future. Now, that may be accurate, but each mistake adds up and the situation would be a lot less costly and drastic if the taxpayers did not just abandon all responsibility because of one mistake. The taxpayers end up paying another substantial penalty in addition to the taxes owed known as the late filing penalty. These three penalties in addition to interest on the outstanding tax liability and penalties assessed are the reason that many taxpayers fall behind and end up paying so much more than they should have if they just adhered to the due dates and requirements of paying as you go and filing tax returns timely or only allowed one mistake to occur and got back on the horse paying and filing as required.

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