Investor · San Diego, CA · Member since 2012 · 309 posts · 18 votes
Hey guys!
I submitted all requested paperwork to our accountant on March 30th, 2016. When I had my appointment, I explained that we need to ensure to submit the taxes ON TIME as we may owe in back taxes, in which case penalties accrue. We even discussed that if he doesn't have a chance to submit the taxes on time and ends up submitting an extension (he was supposed to be moving offices), he will have to run the numbers, and if numbers show we owed anything, we would send a check to IRS before April 18, 2016, and then IRS would reimburse us (if there's balance left) once he gets a chance to complete the taxes and submit. I specifically said I did not want any penalties due to not submitting taxes on time.
I have been following up with the accountant since then, and finally today he emailed me he did not get a chance to even run the numbers, that he was too busy with personal matters and that he will run the numbers within the next week, and that if we do owe anything, we will have to pay penalties.
Apart from the fact that I am completely dissatisfied with his inability to deliver, I wonder if this has happened to any of you?
If we owe IRS 10K, how much penalty are we looking at?
I feel the accountant is responsible to pick up that penalty bill (obviously he does not think that). Or could you say I did not give him enough time to submit the taxes?! We only have 7 rental units and some stocks, our taxes are not that complicated. What would you do?
"If we owe IRS 10K, how much penalty are we looking at?"
Failure-to-pay penalty. The failure-to-pay penalty, which is the penalty the IRS assesses for failing to pay your amount of tax due by the original due date of your return, which in this case is April 18, 2016, is calculated as 0.5% of your unpaid taxes for each month or part of a month after the due date that your taxes are not paid, not to exceed 25% of your unpaid taxes.
Example 1. So let's say you still owe the IRS $10,000 in taxes for 2015, and you pay this on May 13, 2016, which is less than a month after April 18, 2016. Your failure-to-pay penalty would be $50, calculated as $10,000 x 0.5%/month x 1 month or part of a month. "Month or part of a month" will be shorthanded as "month" throughout the examples in this post.
Example 2. Instead of paying on May 13, 2016, let's say you pay on May 31, 2016. Your failure-to-pay penalty would be $100, calculated as $10,000 x 0.5%/month x 2 months.
Note that the failure-to-pay penalty increases to 1% (rather than 0.5%) if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.
Failure-to-file penalty. I also assume that your accountant did file an extension on your behalf. If not, there is a failure-to-file penalty for failing to file or extend your tax return by the original due date of your return, which in this case is April 18, 2016. This penalty is heftier than the failure-to-pay penalty and is calculated as 5% of your unpaid taxes for each month or part of a month after the due date that your return is not filed, not to exceed 25% of your unpaid taxes. However, note that if both the failure-to-file penalty and the failure-to-pay penalty described above apply in any month or part of a month, the maximum amount charged for these two penalties for that month or part of a month is 5%.
Example 3. You still owe the IRS $10,000 in taxes for 2015, but your return is not failed or paid, nor is the tax paid, by April 18, 2016. You get around to filing your return and paying your tax liability on May 13, 2016, which is less than a month after April 18, 2016. Your failure-to-pay penalty would be $50 as described in Example 1 above. Your failure-to-file penalty would be calculated as $500 ($10,000 x 5%/month x 1 month). However, because the maximum combined failure-to-file penalty and failure-to-pay penalty is 5% for any given month or part of a month, your total penalty would be capped at $500. Technically, the failure-to-file penalty is actually reduced by the failure-to-pay penalty, so this $500 is allocated as $50 failure-to-pay penalty and $450 failure-to-file penalty.
Example 4. Instead of filing and paying on May 13, 2016, let's say you file and pay on May 31, 2016. Your combined failure-to-file penalty and failure-to-pay penalty would be $1,000, calculated as $10,000 x 5%/month x 2 months. This is allocated as $100 failure-to-pay penalty and $900 failure-to-file penalty.
Note that while this does not apply to your hypothetical example of $10,000 in taxes due, there is a minimum failure-to-file penalty if the return is filed more than 60 days after the due date (or extended due date), which is calculated as the smaller of $135 or 100 percent of the unpaid tax.
Estimated tax penalty. There may be an additional penalty known as the estimated tax penalty, but I cannot ballpark that for you without knowing when you made your tax payments throughout the year and when your income came in throughout the year.
Interest. Interest accrues on any unpaid tax from the original due date of the return until the date of payment in full. The interest rate is determined quarterly as the federal short-term rate plus 3%. Interest compounds daily. On a $10,000 tax bill, your interest would be less than $5 if paid within 60 days of the due date.
Moral of the story. Time is of the essence here. Your accountant said that "he will run the numbers within the next week". This is unacceptable. If he is truly concerned about his client, he will make sure that he gets you the payment due ASAP to minimize your penalties. Remember, if you pay on or before May 18, your penalties are based on only 1 month. If you pay on or after May 19, your penalties are based on 2 months. I say fire this guy and find yourself a better CPA. :) Life happens, but the lack of communication is unacceptable and unprofessional.
"I feel the accountant is responsible to pick up that penalty bill (obviously he does not think that). Or could you say I did not give him enough time to submit the taxes?!"
In the eyes of the IRS, you are responsible to pay the penalties, not your accountant. To nip confusion in the bud before it happens, I make sure that there is explicit language in my Statement of Work (engagement letter) to cover this stuff. I have a drop dead deadline of March 15 for my clients to give me their information. If they get me 100% of their information on or by 11:59:59 PM on March 15, I will file their tax return by April 15 (or whatever variant due to weekends/holidays). However, if there is still information missing on March 15, I will take whatever was given to me on or by 11:59:59 PM on March 15, calculate their tax due based on that information alone, relay that information to the client so they can pay the tax, and I will file the extension. I may complete the tax return out of the goodness of my heart even if I receive information after March 15, but my clients do not expect it. I will cover any failure-to-file penalties due to my negligence (has never happened), but my clients are responsible for any failure-to-pay penalties. This is explicit in my Statement of Work, and I believe it to be perfectly reasonable given my protocols described above.
I hope I've been of value here. I've learned a lot from this community, and I want to give back. Feel free to reach out for anything.
