IRS waiving penalty on some late payments

Real Estate Tax Talk

Tax season got off to a late start this year, thanks to last-minute tax legislation by Congress that required the IRS to make multiple changes to many of its forms and software.

For details, see my Jan. 11, 2013 article "IRS still updating some key 2012 tax forms." Because of this delay, the IRS has decided to give taxpayers who need to file extensions a break.

When you file for an automatic six-month extension to file your tax return, you are required to estimate your taxes due for the year and pay that amount by April 15. You then have until Oct. 15 to file your return.

Such estimates can be tricky to make accurately. If, after your complete your actual return for the year, it turns out that your estimate of your tax due was too low, the IRS normally charges a late-payment penalty of 0.5 percent per month on all your tax payments made after April 15, up to a maximum of 25 percent of the unpaid tax, plus interest.

The IRS has decided to waive this penalty for taxpayers who must file one of the tax forms that was delayed because of the last-minute changes. These include forms filed by many real property owners: IRS Form 4562, Depreciation and Amortization (Including Information on Listed Property) and Form 8582 Passive Activity Loss Limitations. It also includes real estate pros who file Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits.

The IRS will waive the late filing penalty for these filers provided that:

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  • a good faith effort was made to properly estimate the tax liability on the extension application,
  • the estimated amount is paid by the original due date of the return, and
  • any tax owed on the return is fully paid no later than the extended due date of the return.

Eligible taxpayers need not make any special notation on their extension request to obtain this relief. For this reason, the IRS won’t know that you’re eligible for the relief. Thus, if you filed an extension and underpaid your taxes, the IRS will still send you an assessment notice.

To obtain the late penalty relief, you’ll have to submit a letter to the IRS describing your eligibility for the relief, identifying which of the forms you’ve filed that were affected by the tax season delay, and referring to IRS Notice 2013-24. After receipt of this letter, the IRS should cancel the assessment.

However, keep in mind that affected taxpayers will still have to pay interest on their late payments.

For more details, see IRS Notice 2013-24.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.

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