When working with clients on tax preparation and tax planning, we recommend that our clients file their individual tax return, Form 1040, as early as possible. The due date for filing Form 1040 is April 15, and taxpayers can avail themselves of an automatic six-month extension of time to file, allowing them to timely file Form 1040 on or before October 15.
There are some taxpayers who are waiting for a partnership K-1 or a Form 1099-R to be received, and then there are those brokerage statements which are issued, amended, and amended again. These individuals have a good reason to delay the filing of their tax returns. However, there are procrastinators who have received all of their tax documents and could file, but for whatever reason, put off until tomorrow what they could do today.
Let’s look at some of the potential problems that could arise when the filing of a Form 1040 tax return is delayed.
Identify Theft: The IRS recommends that taxpayers file as early as possible to minimize the chances of an ID thief using your social security number and filing a false tax return to collect a refund. Tax return ID theft has become such a major problem that the IRS is currently taking about six months to begin to review a taxpayer’s claim of identity theft. This means that if you are due a refund, you are going to have a very long wait before you receive it because of the IRS backlog.
College Financial Aid: The Free Application for Federal Student Aid (FAFSA) has various due dates. There is the federal due date, states have their own due dates, and the colleges have their due dates. It is important that the FAFSA application be submitted as early as possible as some financial aid programs are on a first-in basis.
Re-Financing and Applying for a Loan: Lenders want to see the most recent tax return filed. While you may have an extension of time to file, the lender may be reluctant to grant the re-fi or loan without first seeing the most recent year’s tax filing.
Health Care Subsidy: Yahoo News reported that one IRS estimate showed that up to 1.8 million households were at risk of losing their health care subsidies because they have yet to file their 2014 tax returns. According to reports from insurance companies, consumers could lose their financial aid due to coordination issues between the IRS and marketplaces like HealthCare.gov. The program is also complicated to administer for its two lead government agencies, the Centers for Medicare and Medicaid Services, which runs HealthCare.gov, and the IRS. Federal law imposes strict privacy safeguards for tax returns, and there are limits to information the IRS can provide to other agencies. Tax returns take time to process, and HealthCare.gov can’t get real-time updates. Accordingly, insurance companies are concerned that satisfied customers just waiting for their coverage to automatically renew might get a nasty surprise. It was reported that someone who’s been paying a monthly premium of $90 could suddenly receive a bill for $360. Yahoo also reported that the IRS started notifying tardy filers in mid-July. The form letters spell out in bold type that filing an electronic tax return within 30 days “will greatly reduce the risk of an interruption” in health care subsidies. So here is a perfect example of someone who timely files their 2014 tax return by October 15, but HealthCare.gov might not reflect that information until much later.
Penalties for Late Payment of Taxes: While taxpayers may request an automatic 6-month extension of time to file their tax returns, there is no extension of time to pay. The full tax liability must be paid by April 15; otherwise the IRS will assess late payment penalties. In addition, if the taxpayer is required to pay estimated taxes, by delaying the filing of the current year’s tax return, the taxpayer may be subject to additional penalties for failure to pay adequate estimated tax payments for the succeeding tax year.
If you want to discuss your tax preparation or tax planning concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.