Tax-Filing Tips to Avoid Penalties
By Harry Teichman
Harry Teichman is an associate at Squire Sanders and Dempsey, LLP, in Tampa, Florida. Harry can be contacted at
Everyone likes to hear about ways to make tax filings easier and less painful. The following tips apply to everyone, every year, and could end up saving you (or your clients) thousands.
1. Always, always, always mail anything to the IRS using United States Postal Service Certified Mail, and retain the proof of delivery receipt for at least six years. The rule for items mailed to the IRS is that timely mailed is timely filed. If a return is lost in the mail and the certified mail receipt demonstrates that the return was timely mailed, this is proof as a matter of law that the return was timely mailed. If an item is mailed a day late, however, the item will not be deemed received until it actually is received.

2. Applying for the automatic extension to file a return does not mean the taxpayer has an extension to pay the taxes. Many of my clients are shocked when they get hefty penalty bills from the IRS for failure to timely pay their taxes—despite their meticulous record keeping regarding the automatic extensions that they requested. Make a good estimate of your tax obligation, and pay it by the due date of the return. The penalty for failure to pay on time is one-half of one percent (.5%) of the outstanding balance per month; interest accrues on the outstanding balance plus penalty (about 8% currently). If a taxpayer doesn’t have the money to pay the tax, try applying for an installment agreement, which will reduce the penalty on the underpayment (but not the interest) to one-quarter percent (.25%) per month. Many times the IRS will agree to a short-term installment agreement (12 months or less) over the phone without substantial documentation from the taxpayer. Waiting for the IRS to contact the delinquent taxpayer will certainly make this process more difficult (and more expensive).

3. As a corollary to Rule 2, always file a tax return on time (on time means including any properly granted extensions), especially if the taxpayer does not have the money to pay all of the taxes indicated on the return. It is not a crime to fail to pay taxes; it is a crime to willfully fail to file a return. If that fact alone is not incentive enough, the penalty for failure to timely file is 5 percent (5%) of the outstanding balance per month. This penalty includes the penalty for failure to pay and is capped at 25% of the outstanding balance (but interest continues to accrue on the penalty and the principal).

Many of my clients don’t file returns because they don’t have the money to pay. For example, Client 1 files a return on time but no payment; when, six months later, she has the money together to pay the tax, she will be responsible for the original amount plus a 3% penalty—in addition to six months of interest. Client 2 foolishly doesn’t file even a return, and thus is liable for a 25% penalty on the amount owed, as well as interest on the penalty and the principal. (The tax is due by April 15 whether or not a return is filed.)