TAX   FILING

Avoiding Estimated Penalties

    Uncle Sam wants his tax money shortly after income is earned. As a result, you cannot pay all of your income tax when you file your return for the current year. Instead, you must pay taxes through regular income tax withholding from your paychecks or send in quarterly estimated tax payments to the IRS -- or both.
    The next estimated tax deadline is Monday, September 15th.
    If you don't meet the estimated tax rules, you could be slapped with a penalty tax in addition to the actual tax liability and interest. The penalty is equivalent to the interest due on tax underpayments. You must figure out the amount of the underpayment for each period of time and the number of days in that period. Then, you apply the prevailing interest rates.
    Fortunately, you can avoid an estimated tax penalty if you're careful. Even if you don't satisfy the general requirements, no penalty will be imposed if you qualify for one of these three "safe-harbor" exceptions.
    1. You pay at least 100 percent of the prior year's tax liability (110 percent if your AGI for the prior year exceeded $150,000). For example, if you receive a regular salary, all you have to do is to adjust your withholding payments for the year to equal 100 percent (or 110 percent) of the prior year's tax liability.
    2. You pay at least 90 percent of the current year's tax liability. This requires you to keep close track of your payments for the year.
   3. You pay at least 90 percent of the current year's tax liability on your "annualized income." This method works best for self-employed individuals and other taxpayers who receive most of their income in spurts or on a seasonal basis.
    The first two safe-harbor exceptions are relatively well-known, but fewer people know about the annualized income exception for seasonal businesses.
    How it works: To annualize your income, take the amount of taxable income for each installment period and multiply it by 12. Then divide that figure by the number of months to the end of the installment period. The payment by the first due date must be at least 22.5 percent of the annualized tax; 45 percent by the second installment; 67.5 percent by the third; and 90 percent by the fourth.
    If you use the annualized income method, you must remember to add the difference between the amount you pay and the required installment to the required installment for the next quarterly period if the annualized method is not used for the next period.
    The annualized method is frequently used by a business generating most of its income during the year-end holidays. But the tax computations can be complex. Your tax adviser can crunch the numbers to determine if this safe harbor exception makes sense in your situation.

The Deadlines

    Unless you're covered by withholding, estimated payments must be made in four quarterly installments during the year. The due dates are listed below. Note that the "quarters" for this purpose are a bit uneven:
    The 1st quarter (January 1 - March 31) is due April 15.
    The 2nd quarter (April 1 - May 31) is due June 15.
    The 3rd quarter (June 1 - August 31) is due September 15.
    The 4th quarter (September 1 - December 31) is due January 15 of the following year.
    If a due date falls on a Saturday, Sunday, or a holiday, the due date is extended until the next business day.

IRS Gives More Balance
To Business Filing Extensions

The IRS has announced a significant change for business entities that take advantage of annual tax filing extensions. By shortening the time that businesses have to report information by one month, the IRS hopes to give individual taxpayers sufficient time to complete their personal tax returns by the filing extension deadline.

The change is generally effective for filing extensions requested for the 2008 tax year. So you can't take advantage of the new rules for 2007 returns.

Background: As things stand now, the filing extension for both business and individual taxpayers often falls on the same date -- October 15th. (The October 15th deadline is extended to the next business day if it falls on a weekend or federal holiday.)

But the filings for businesses often include items of income, deduction and credit that are reported by pass-through entities like partnerships, S corporations and estates and trusts on Schedules K-1s and comparable forms and schedules. Then, the recipients (including partners, investors and beneficiaries) must use the information to finish up their own tax returns.

In other words, an individual taxpayer may have to complete his or her personal tax return by the October 15th deadline-even though he or she may not have access to all the relevant information until October 15th. This puts some taxpayers in a difficult situation.

To remedy this long-standing problem, the IRS has issued new temporary and proposed regulations that push up the extended due date for providing K-1s and similar statements from six months to five months.

Therefore, the new deadline for business entities will generally be September 15th instead of October 15th. This should give individual taxpayers enough time-at least one month-to prepare and file their returns.

The change is effective for extension requests filing with respect to tax returns due on or after January 1, 2009. It applies to business entities filing the following returns and forms with a tax year ending on or after September 30, 2008:

• Form 1065, U.S.Return of Partnership Income;
• Form 1041, U.S. Income Tax Return for Estates & Trusts; and
• Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).

The new regulations will not affect the process of requesting an extension of time to file, nor do they apply to extensions of time to file by other types of business returns.

Note that S corporations have a standard tax return due date of March 15 (unless it falls on a weekend or holiday). Thus, with a normal six-month extension, S corporations are already required to furnish information to shareholders by September 15. 

The change does, however, bring other pass-through entities like partnerships and estates and trusts in line with the extended due date for S Corporations.

If you file your federal tax return late, you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month (or part of a month) that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions). If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return. (In addition to the late filing penalty, there is also a late payment penalty.)