MedEsthetics magazines offers business education and in-depth coverage of the latest noninvasive cosmetic procedures for physicians and practice managers working in the medical aesthetics industry.
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52 APRIL 2014 | Med Esthetics AFTER THE DEADLINE The Money Is Not in the Bank Although the last bill anyone should ignore is a tax bill, it is not uncommon for a business to fi nd itself unable to pay its full tax liability for a given year. In these cases, the IRS does offer extensions and alternative payment arrangements, but penalties and interest do apply. In gen- eral, there are three separate penalties levied by the IRS: • Failure to File Penalty • Failure to Pay Penalty • Interest on Unpaid Balances Using Form 4868, "Automatic Extension of Time to File a U.S. Individual Tax Return," a medical practitioner can obtain an automatic, six-month extension of time in which to fi le tax returns. Incorporated businesses and LLCs may obtain the automatic six-month extension of time to fi le income tax returns by submitting Form 7004, "Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns." Remember, however, that an extension of time to fi le is not an extension of time to pay. A proper estimate of tax liability is required, even if you have not fi led your taxes, and penalties will accrue until payment based on this estimate is received. The "failure to fi le" penalty for those who owe money to the IRS accrues at a rate of 5% per month or partial month (to a maximum of 25% reached after fi ve months) on the amount that would be owed. The "failure to pay" penalty accrues at a rate of only 0.5% per month or partial month (to a maximum of 25% reached after 50 month) on the amount shown as due on the return. If both apply, the failure to fi le penalty drops to 4.5% per month, so the total combined penalty remains at 5%. Thus, the maximum combined penalty for the fi rst fi ve months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In total, these combined penalties can reach 47.5% of the unpaid tax liability in less than fi ve years. And don't forget, both the failure to fi le and failure to pay penalties are in addition to interest charged for all late payments. If estimated tax payments were also missed, an additional penalty is tacked on for missed estimated tax payments. This penalty is computed at 3% above the fl uctuating federal short-term interest rate for the period. Loans vs. Penalties Given the rate at which penalties and interest grow, many medical practitioners borrow money to pay their taxes. In many cases, the rate of interest that would be paid to a family member, or even to a bank, is less over- all than that which would have to be paid to the IRS. Similarly, there are a number of advantages to paying taxes by credit card, including the fact that it is convenient. Credit card loans, however, are likely to carry high interest rates, and that interest is not tax deductible. While the IRS does not charge any fees for card pay- ments, so-called "convenience" fees can be levied by third-party vendors that process credit card payments for the IRS. These convenience fees are a deductible business and individual expense. When determining the best course of action, practi- tioners would be wise to examine the credit card rates versus the penalties and interest charged by the IRS for delaying fi ling or delaying payment after the return is fi led. A short-term fi ling extension gives an individual or practice owner up to 120 days to fi le and pay its taxes, but the "failure to pay" penalty plus interest will apply. An extension of time to pay is also available to those who can show that payment would cause "undue hard- ship." Qualifying for an undue hardship extension gives the fi ler an extra six months in which to pay the tax due. The failure to pay penalty is avoided with this option, but you will have to pay interest on the balance. The IRS does accept installment payments for some tax debts. Generally, taxpayers can make installment payments on the taxes owed—if the total amount owed is $25,000 or less. In fact, the IRS is required to enter into a "guaranteed installment agreement," when the tax liability is $10,000 or less (not counting interest and penalties). If more than $25,000 is due, payment plan options also exist, but the IRS must fi rst determine eligibility. While partial-pay installment agreements are relatively Q u a l i f y i n g f o r a n u n d u e Qualifying for an undue h a r d s h i p e x t e n s i o n g i v e s t h e hardship extension gives the f i l e r a n e x t r a s i x m o n t h s i n filer an extra six months in w h i c h t o p a y t h e t a x d u e . which to pay the tax due. © THINKSTOCK A f t e r D e a d l i n e M E D 4 1 4 . i n d d 5 2 After Deadline MED414.indd 52 3 / 1 3 / 1 4 9 : 2 2 A M 3/13/14 9:22 AM