Announcer:
It is time now on KROS for Financial Focus, brought to you by Nelson Core Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative, securities offered through Cambridge Investment Research. Incorporated, a broker dealer, member, FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors, Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s financial focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink. I have Andy Ferguson with me with NelsonCorp Tax Solutions. Third Wednesday of the month, October’s flying by. We have frost on the ground. Playoff baseball, last regular season football game for some area teams.
Andy Fergurson:
Hockey season started.
Nate Kreinbrink:
Hockey season started, and basketball season’s getting ready to start. It’s like the ultimate crossover if you’re, I guess, a sports fan.
Andy Fergurson:
Yeah, yeah. It’s a great time of year. The most wonderful time of year, right?
Nate Kreinbrink:
It is.
Andy Fergurson:
And tax season is finally over.
Nate Kreinbrink:
I know, and it’s funny, you said that yesterday and I knew I knew that, but I guess it doesn’t stick out to me. Everyone thinks April 15th, April 16th, middle of April, right there as the tax deadline, the end of tax season. But there is actually another tax deadline, which is the officially official tax deadline, and that was yesterday.
Andy Fergurson:
Yeah. So there is an opportunity for every taxpayer, every year they can file an automatic extension. If they file the automatic extension, they get six months, no questions asked to file their tax return. And so six months plus April 15th equals October 15th. And so what that does is it gives those of us that want to procrastinate a little bit six months to delay the inevitable and wait until October 13th to start working on our taxes.
Nate Kreinbrink:
And I know you mentioned that thing, and I think there is some misconception when people think of an extension or they hear that there is an option for an extension, that’s not a full extension with everything though. If you still owe taxes, you still have to pay the taxes by the April 15th deadline. The October one is simply just to file the actual return for that.
Andy Fergurson:
Absolutely. The extension to file is different than the payment due date. Taxes are always due April 15th. The extension to file is just what it says. It’s an extension to file the return. If you have a balance due, that balance due is April 15th. So if you file on 10/15 or on October 15th and you owe a thousand dollars, you owe a thousand dollars as of April 15th, which means interest started accruing on that thousand dollars on April 15th. And so when you file and pay your a thousand dollars a couple weeks later, you’re going to get a letter in the mail that says, “Thank you for the thousand dollars. You also owe us interest on that thousand dollars because it was due April 15th.”
Nate Kreinbrink:
Right. And so when you say there’s interest that is starting to be accrued, I think there is some confusion too sometimes as far as interest and penalties. There’s again, the different fees that are added and maybe take a little bit and explain the difference between the two and when each one would apply.
Andy Fergurson:
Yeah, so the filing deadline and the payment deadline both come with penalties, and interest happens when you don’t pay your tax by the tax deadline. So if you have tax due at all and it’s not paid in full by April 15th, they begin accruing interest, and that’s when they’ll send you a letter that says, “Hey, you owed us this much money. You paid us short of that much money so we’ve applied some interest.” Penalty comes for failure to comply to the law. So if you fail to file on time, so if you didn’t file, let’s say you filed an extension, which gives you till October 15th, but you still have not filed your taxes as of today.
If you have a balance due, you will be assessed a failure to file penalty. That failure to file penalty will be in addition to the tax you owe and the interest you owe, and it will be a penalty added on top of the tax. That penalty for individuals and corporations is handled differently. Penalties for individuals are usually related to a percentage of their tax. So what makes that interesting is that if you don’t owe a tax, interest is a relation to the amount of tax you owe and penalty is a relation to the amount of tax you owe, so if you don’t owe any tax, if the penalty is 10% of the tax you owe and you don’t owe them anything, 10% of zero is zero. So the penalty effectively is zero. Consequently, the interest rate on zero is also zero.
So if you don’t owe tax, if you do a refund, there’s effectively no penalty, no interest for you if you haven’t filed yet. But if you do and you haven’t filed as of yesterday at midnight, you owe penalty, you owe interest for failure to file and you’ll owe interest for tax due and the interest on it.
Nate Kreinbrink:
Okay, so go into that. So we’re a day past the deadline here, so the penalties and interest will start accruing with that. Is that on a day-to-day basis or is that per month that you have to do that?
Andy Fergurson:
So interest accrues in daily rates. The first couple of days hold an interest rate. I think it’s the first two to five days hold one rate, and then five to 10 days hold another rate, and then after 10 days is a third rate for individuals as far as interest is concerned. Penalties are assigned based on the term of lateness. That’s usually by month and it’s usually a month or part of month. So usually the penalty is assigned at a percentage for every month or part of month that the return is… for example, the failure to file penalty is assigned for however late the return is for every day late or month late or part of month late. So if you file today, 10/16, you’re one day late, but you’re technically a part of a month late, so that’s one part month late. So you get one assessed percentage. If you file on November 16th, you’re one month plus one part of a month late. So even though you were only 32 days late, you’re one month plus one part of a month and it’s every month or part of a month they assess that penalty.
Nate Kreinbrink:
So essentially just pay on time and file on time.
Andy Fergurson:
Essentially just pay on time. If you pay on time, you don’t pay extra.
Nate Kreinbrink:
You don’t pay.
Andy Fergurson:
I don’t know a lot of people who are interested in paying extra. The year ends on 12/31. Here we are 10/15. We should have had time to get our stuff together and get it calculated.
Nate Kreinbrink:
During that time period. And again, we just hit as far as the restrictions and some of the penalties and the interest that gets accrued again for failure to pay to failure to file. Now again, there’s a flip side to that, and you were talking about this yesterday, and I guess I never really realized this as far as on the flip side of a return, if I’m entitled to a refund and I am late a year, two years, three years or more, there’s some differences as far as what kind of go back I can look at to get my refund and be able to file that and expect to get it from the IRS.
Andy Fergurson:
Yeah. So the advantage to having a refund is they’re not going to assess an individual a penalty on a refund return or a zero balance return. The disadvantage is that you only have three years to file that. So if the IRS owes you money, they say you have three years to file that return if you want the money. So yesterday, if you filed an extension on your 2021 tax return, you had until yesterday to get that return filed, and they would pay you the refund for that return. If you file it today and the IRS owes you $500, they will send you a letter that says, “Thank you for the return. We appreciate your time and effort, but you don’t get the money because you are past the statute because you only have three years to collect that refund.”
Nate Kreinbrink:
If you’re entitled to a refund from a year prior, two years prior, again, and you still have not filed to recoup your own money, you need to do that.
Andy Fergurson:
Yeah. And I think 2021, you may have another month, because I feel like 2021, there might’ve been another month of time. I think the deadline in 2021 might’ve been May 15th instead of April 15th. I don’t remember that exactly. There may be a couple of days left for 2021, but either way, yeah, you’ve got to get them done within three years in order to get that refund.
Nate Kreinbrink:
Well, and a lot of this stuff, and again, some of this you want to have done by the 12/31 deadline. We are already to the middle of October already. And it’s also important to keep in mind that the IRS does shut down for a little bit at the end of the year. So you may want to, again, if there’s something you need to do, don’t wait until those last couple of weeks because you may not get anybody.
Andy Fergurson:
Yeah, a lot of people don’t know that every year at the end of the year, the IRS shuts down for about a month. Usually early in December, they will close the offices and they do an update of their computer systems so that they can be ready for tax season when it starts. So they’ll shut down for a period of time and won’t reopen the IRS until the middle of January when they open for tax season. So what that does is that shuts down your ability to electronically file. You can still file, but what happens is the return won’t get processed, it just sits and waits in a queue. You won’t get a refund, it’s just waiting.
So if that’s important or you’re trying to get something done for some other deadline for a bank loan or something like that, if you need some kind of response from the IRS, you got to get going because they’ll shut that process down. Regular things will still happen. The monies that they pay out and letters and stuff will still come out of the IRS. The automated things will still come out of the IRS, but as far as the processing of tax returns, their computer system will shut down.
Nate Kreinbrink:
All great stuff. And again, you got questions on any of those deadlines, previous returns, upcoming returns, give you a call, now’s the time to talk to you.
Andy Fergurson:
Yeah. It’s off season now because tax season’s over. So I got like five minutes and then we’ll be ready to get full on into it, coming into it.
Nate Kreinbrink:
Full on into it.
Andy Fergurson:
Once the holidays come through, we’re going to start a party again.
Nate Kreinbrink:
We’re all excited. And again, third Wednesday of every month we talk taxes. Glad to have it. Time goes by quick. Did want to mention though, before we do run out of time, that every Friday, NelsonCorp Wealth Management and NelsonCorp Tax Solutions are wearing jeans for charity. Money raised in the month of October will be donated to the Mississippi River Eco Tourism Center. Andy, as always, appreciate your time.
Andy Fergurson:
You bet.
Nate Kreinbrink:
This is Nate and Andy bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative, securities offered through Cambridge Investment Research Incorporated, a broker dealer, member, FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.