Hello, I am ready to file amendments for both 2017 and 2018. At the end of my 2017 return, it allows me to apply my expected refund to another year's "estimated" tax. Does this mean only 2019 and beyond, or could I apply it to what I owe on my 2018 amendment? Thank you!!
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Can I use expected refund to pay another year?
- Thread starter ryanf1475
- Start date
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LdiJ
Senior Member
If the 2018 amendment is processed first, then the 2017 refund will get applied to 2018 and you won't pay as much interest. If the 2017 amendment gets processed first, then you will get that refund and will have to pay the entire balance for 2018 plus interest and penalty on the whole thing. Unfortunately, amended returns take a much longer amount of time to be processed than regular tax returns and that is part of the problem.
If you can afford it, it would be cleaner to pay your balance due with the 2018 return and get your refund for 2017.
OK, so I will just let them bill me any interest I owe, but in terms of paying taxes, am I "allowed" to just pay the difference, or will I be penalized for this?
LdiJ
Senior Member
There is going to be penalty and interest no matter when you pay. Its the total amount of penalty and interest that will come into play. The penalty and interest is going to be because you owed more tax than you originally paid (or got too much refund) and therefore you will have interest and penalty from April 15th on. If you pay the full 600.00 up front, you will incur the least amount of penalty and interest. If you pay only 100.00 up front, then you will have additional penalty and interest on the remaining 500.00 until its paid by the refund on the 2017 amendment, assuming that happens at all.
LdiJ
Senior Member
The failure to file penalty is 5% per month up to 25%.
The failure to pay penalty is 1/2% per month but is waived on the months there is an failure to file penalty
The interest rate is around 4% annually but varies with the prime rate.
There are other potential penalties but those are for much more substantial mistakes.
Taxing Matters
Overtaxed Member
Close, but not quite correct. Also, the base on which each penalty and interest are computed is different, so I'll dive into the details a bit on that, too.
The failure to file penalty is indeed 5% of the tax that was due as of the due date of the return. This penalty continues at that rate each month (or fraction of a month) until the penalty reaches 25% of the tax that was due as of the due date of the return. This means that any payments made after the return due date do not reduce this penalty. This penalty is reduced (not waived) by the amount of the late payment penalty imposed in the same month. (You had this part reversed.) This has the effect of the actual maximum late filing penalty being 22.5% in the case where the return is filed more than five months late and the tax was also outstanding with no payments made during that time.
The failure to pay penalty starts on the due date of the return and is ½% of the tax that is unpaid at the due date of the return or assessment of the tax (for additional tax assessed after the filing of the return). The penalty penalty continues each month at that same rate, but computed on the tax still owed at the start of each month. This means that unlike the failure to file penalty, payments made after the return due date do reduce the amount on which the penalty is computed. This penalty is also affected by two things. First, the penalty is increased to 1% per month on the tax outstanding at the start of the month if the tax is not paid by the time the IRS sends the statutory notice of intent to levy (what the IRS calls its "final notice") which the law requires the IRS send by certified mail to the taxpayer's last known address. This notice tells you that if you do not pay within 30 days the IRS intends to collect what is owed by levying income and assets of the taxpayer. On the other hand, if the taxpayer enters into an installment agreement to pay the liability prior to the IRS sending that final notice, the late payment penalty is reduced to ¼% per month on the tax unpaid at the start of the month. So if you cannot pay it all at once and need an installment agreement (IA) to pay it off, you really want to get the IA in place before the final notice is sent and ideally as soon after the first bill as possible to keep the late payment penalty as low as possible.
Both the late payment and late filing penalties may be abated if the taxpayer has reasonable cause for the failure to pay or file late.
The interest rate on delinquent tax liabilities changes every quarter and the IRS announces the rate prior to the quarter in a Revenue Ruling published in the Internal Revenue Bulletin, which comes out weekly. The interest rate other than for large corporations is determined as the federal short term rate plus three percent. (This is the same rate the IRS pays on refunds, too.) The current interest rate is 5% per year compounded daily. (That means the effective annual interest rate is 5.13%.) This took effect July 1. The amount the interest rate is computed on is the amount of unpaid tax, failure to file penalty, and interest from the due date of the return and other additions to tax (e.g. the late payment penalty) as of the date that addition is assessed. See Rev. Rul. 2019-15. If you look at page 10 of the ruling it contains a table of the non corporate interest rates that have been in effect from 1999 to the present. Interest cannot be abated for reasonable cause, but if the tax or penalty added to a liability is abated the interest will be adjusted accordingly. Because the interest runs on pretty much everything and is compounded daily paying your liability even a day earlier saves you some interest, so the sooner you pay, even by a day, saves you money.
By the way, for individual income tax, payments are generally applied to the oldest period you owe first, and on that year it is applied first to the tax you owe then to penalty and interest.
Taxing Matters
Overtaxed Member
For purposes of clarification, I assume you mean the interest rate.
FlyingRon
Senior Member
Yes, I was pointing out that Ldij's numbers were old. It hasn't been 4% since 2018Q1. It was 5% for the rest of 2018 and 6% for the first half of this year.For purposes of clarification, I assume you mean the interest rate.
LdiJ
Senior Member
I admit that I hadn't noticed that the interest rate has been climbing.
LdiJ
Senior Member
If he pays the 600.00 and its for 2018 (assuming that is actually 600.00) with the amendment and the amendment goes in before July 15th, then its going to be just under 100.00 in interest and penalty. If he waits to allow the 2017 refund to get applied to the 2018 amendment balance due then it could add another 60-70 dollars in interest and penalty depending on how long it take the 2017 amendment to get processed
There are a lot of variables here that cannot be known with precision.
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