@bhuether wrote:
Hi, why is it too late to avoid penalties, if my filing due date (living overseas) is 15 October (with extension)?
I suppose in this case, if I have cash that I am prepared to give as an OIC offer then makes sense to just send the money to the IRS now.
There is a failure to file penalty and a failure to pay or underpayment penalty. You don't get the failure to file penalty as long as you file "on time", whatever you can extend that to. But the failure to pay/underpayment penalty is applied whenever you owe a tax debt that is more than a certain dollar amount.
https://www.irs.gov/taxtopics/tc306
"The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax."
You can avoid the underpayment penalty if
1. the tax you owe is less than $1000
2. the tax you paid into the system is at least 90% of your tax liability this year
3. the tax you paid into the system is at least 100% of your liability last year (or 110% of your liability last year if your income is more than $150,000).
Your final estimated payment was due January 15, so you are one month late. If you pay by February 15, you would still be considered 1 month late. You are also considered to be 9 months late on the payment that was due April 15, 7 months late on the payment that was due June 15, and 4 months late on the payment that was due September 15. The IRS can take what you owe, break it up into 4 payments that should have been made on those dates, and assess penalties and interest back to those due dates.
My suggestion is to pay as much as you can now and try and get to that 90% figure or the 110% figure from last year. Then you would only have 1 month of penalties (if the payment is made by February 15).
The real question is, are you willing to pay the tax you owe, or do you want to reduce your tax bill.
- If you want to reduce your taxes, you will want to file on time, because what you owe will only increase the longer you delay. Make your OIC. Understand the IRS will likely not accept it if they you think you have the resources to pay in full over time without significant hardship.
- If you are willing to pay what you owe, but you need time to get the money together, make as much of an estimated payment as you can now, and file on time. If you can pay in 4 months or less, don't bother getting a payment plan because the non-refundable application fee will be more than the penalties. If it will take longer, apply for a payment plan on the IRS web site after you file your tax return.
Two final notes:
1. the underpayment/failure to pay penalty is just 0.5% per month. Yes, it adds up, but it's not as scary as it might seem. You will also owe interest on any taxes that are paid late, even if you have extensions to file late. Interest is about 4% APR, and will go back to the due dates for the estimated payments. Because the interest accrues no matter what, you don't gain the advantage from delaying your actual filing that you think you are gaining.
2. If you don't include the penalty on your tax return, the IRS will bill you. At that point you can request an abatement. There is an abatement for people who have never owed a penalty before, and an abatement if you can show reasonable cause why you didn't pay. Even if the abatement is granted, the interest can't be waived under law. So you still want to pay what you can when you can to keep the interest down.
