Monday, October 01, 2007

Procrastinators: Get Those Taxes In -- Beware Backup Withholding

It's almost October 15, which means that the six-month automatic extension of time to file your taxes is running out. If you have a refund coming, you didn't even have to request an extension by April 15. The only penalty is a percentage of tax you owe, and since you didn't owe anything, you will receive no penalty.

However, the IRS takes the October 15 deadline more seriously. If you miss it, they will probably notice and start sending you letters -- prodding at first, then demanding. If you receive interest and/or dividends, they will stick you with backup withholding.

Backup withholding is generally for those who have improperly reported interest and dividends -- in other words, tax cheats. However, they will also use it for taxpayers who have done nothing wrong except to miss the October 15 deadline.

Backup withholding means they will notify your bank, stockbroker, etc. -- anyone they know that pays you interest or dividends -- that they must withhold a percentage. The exact portion has varied over the years; at this writing it's 28%. The withholding will be in effect till the end of the year they notify you; and if you're late again, they will extend it another year and so on.

You get the money back on your tax return for the year in question, but it's embarrassing, and a bookkeeping hassle to boot. Besides, if there's one thing you don't want to do, it's to attract the IRS's attention! If you open any new financial accounts, you also have to tell them you are subject to backup withholding.

So get that return filed by October 15. If you don't have all the figures in line by then, you can always file an amended return later. Just make sure to tweak the numbers so you pay a little extra on the earlier return (i.e., so that the amended return results in a refund), or else they'll hit you with penalties because even though you filed on time, you didn't pay on time.