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Tax Planning Center

Failure to File or Pay Penalties: Eight Facts

When it comes to filing your tax return, the IRS can assess a penalty if you fail to file, fail to pay, or both. Here are eight important points about the two different penalties you may face if you file or pay late.

  • If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
  • The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
  • The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
  • If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  • If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
  • If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
  • If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  • You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Ten Facts about Capital Gains and Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss. Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

  • Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
  • When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
  • You must report all capital gains.
  • You may deduct capital losses only on investment property, not on property held for personal use.
  • Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
  • If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
  • The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
  • If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
  • If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
  • Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

Find the Right Tax Professional

Taxes seem to get more complicated every year, and they also seem to take a bigger bite out of your wallet. That's why it's important to get the best advice when you're ready to tackle your annual tax return. The Michigan Association of CPAs recommends asking these questions when you're selecting a tax professional.

What Makes You the Best Person to Do My Return?

Before you pick a tax professional, be sure to ask about his or her education, experience and licensing. Taxes can be confusing, so you want to have the most highly trained person on your side. Remember that CPAs are state-licensed professionals who have to pass the Uniform CPA Examination, a rigorous four-part, 14-hour test. They also must meet their state's education, ethical and work experience requirements to earn their license. In addition, CPAs are required to meet ongoing high standards for continuing education and ethics. That's why so many people turn to CPAs each year for help with tax return preparation.

Can You Explain Your Qualifications to Me?

Don't assume someone is qualified just because of his or her job title. Did you know, for example, that all CPAs can be considered accountants, but not all accountants are CPAs? Many people who call themselves "accountants" or "tax preparers" may well have minimal qualifications or experience. If you want to receive advice from a highly skilled professional, be sure to ask if the person you are considering is a CPA.

How Can You Help Me Save Money on Taxes?

Because of their extensive experience, CPAs can usually spot issues you should address or opportunities you are missing based on what they see in your tax return. You may not be aware of money-saving deductions or credits, for example. Your CPA will recommend smart steps you can take to enhance your tax or general financial situation.

What New Tax Laws May Affect My Return?

Changes in tax legislation can have a significant impact each year. For example, under a new law enacted last July, qualified homebuyers may be eligible for a credit of 10 percent of a home's purchase price--up to $8,000--if you went into contract to buy a principal residence by April 30, 2010 and closed on the home before September 30, 2010. On another front, if you made energy-efficient improvements to your home during the last year, you may qualify for a residential energy property credit. And business owners may be eligible for new incentives and opportunities as a result of the Small Business Jobs Act of 2010. Your CPA can tell you more about how to take advantage of new opportunities, and address challenges, in recent tax legislation.

How Else Can You Help Me Improve My Financial Situation?

While filing your return is your main concern right now, tax time is also a great opportunity to take stock of where you stand financially and consider necessary changes. What are your most pressing financial concerns? What issues keep you up at night? Whatever they are, the chances are that your local CPA has tackled a similar challenge with other clients. CPAs work with individuals and businesses in their communities throughout the year, not just during tax season. They help clients with their tax planning as well as many other financial issues.

Consult Your CPA

Working with a CPA offers reassurance that the job will be done right. If you have questions about your tax situation, or any other aspects of your finances, turn to your local CPA. He or she has the answers you need.

You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA website to search for a CPA in your area or specific field of expertise.

This article was submitted by the Michigan Association of CPAs.