The Real Cost of Paying Late

Today is the deadline for paying individual income taxes. While you can get an extension to file your income tax return you cannot get an extension to pay your tax. If you don't pay the total amount due you will be charged penalties and interest on the shortfall. It's never good to have your IRS record reflect that you paid penalties, but sometimes it can't be avoided. Unexpected changes in your tax situation or last minute cash shortfalls happen. However, many times the inability to pay is due to poor planning or budgeting. In these cases liabilities can go outstanding for several months and the addition to your tax bill can be substantial. So what does it cost to pay late? Here is how IRS calculates the amount of penalties and interest.

If you are underpaid on April 15th IRS charges interest on the unpaid liability. The rate of interest is currently at 7% and goes up and down with the market. IRS adjusts the rate each quarter. Also, interest is calculated daily so filing the return even one day later than the date your CPA has used to calculate interest owed could result in a tax notice from IRS.

IRS also charges a penalty of .5% per month for paying late up to a maximum of 25%. This .5% per month penalty equates to a 6% annual rate so the total cost of not paying your tax when due is equal to a 13% annual rate (7% interest + 6% penalty). That's not low, but it gets worse. IRS calculates interest using the compound method which works great if you're on the receiving end but not so good if you're the one having to pay up. Additionally, IRS charges interest on the amount of the penalty as well. So the effective rate you pay on your unpaid tax liability is somewhere north of 13%.

A bigger penalty is reserved for those who fail to file a tax return. That penalty is 5% of the tax due for each month the return is late, up to a maximum of 25%. You will also pay interest on this unpaid amount as well. For this reason it is imperative that you file an extension if you can't file your tax return by the due date. On the flip side if you owe nothing and don't file your tax return on time you will not pay a penalty for late filing.

Joey Brannon is the founder of Axiom Professional Group, a tax, consulting and accounting firm in Bradenton, Florida. Mr. Brannon is both a CPA and an EA. You can find out more about Axiom by visiting www.axiomcpa.com.

Why should I hire a CPA?

Postings have been thin lately because tax season is upon us. But I thought I would take a time out to cover some recent news. On April 4th the Senate Finance Committee heard testimony from the GAO on the dark side of tax return preparation. Part of the report was covered by NBC News last Wednesday as part of a series in which they sent undercover interns into national tax prep chains to gauge the honesty and accuracy of the return preparers.  It turns out the GAO report and NBC turned up similar issues.

• Failure to report all income and even advice not to report certain types of clearly taxable income.
  



• Advice to knowingly fill out the return incorrectly and buy the chain’s add-on “service guarantee” to cover any deficiency later assessed by IRS.
  



• Incorrect reporting of more complex deductions such as the child and dependent care credit.
  



• Clerical errors  in filling out the return and failing to correclty sign (and taking responsibility) as a paid preparer.
  



• Missing deductions that could save the taxpayer significant amounts.
  



• Failure to correctly report and maximize education credits and deductions.
  

I’m not trying to bash firms like H&R Block or Jackson Hewitt. We don’t compete for the same clients so I have nothing to gain from their demise. However, I do think there should be a minimum standard for tax preparers before they can serve the public. CPA’s must complete 5 years of secondary education, pass a rigorous exam, comply with continuing education requirements, and practice at the pleasure of their state board of accountancy.

Enrolled Agents have to pass a rigorous two day exam on tax law and compliance, comply with continuing education credits and are regulated by the IRS’s Office of Professional Responsibility (which includes a review of their personal tax filings to make sure they are not cheating themselves). Workers in tax prep chains have no such requirements, nor do the countless return preparers who hang out their shingle each spring only to close up shop in May.

So what’s my beef with the world of unregulated tax preparation? I guess the biggest reason is that chain prep firms have conditioned the public to expect big refunds. Everyone thinks they are owed a big IRS bonus in April and they’re happy to get it when in fact this is the worst type of tax planning possible. The best scenario is to owe as much as possible in April while avoiding underpayment penalties. Why should IRS get to use your money all year interest free? Those who use tax refunds as a financial planning tool are on the whole undisciplined and unsophisticated with regard to their financial matters.

Additionally, the skepticism and criticism leveled at “tax preparers” often does not discriminate. CPA’s and EA’s can point to their credentials and say “come to us, we’re different than those unlicensed preparers at H&R Block.” But there are many excellent preparers who invest in their continuing education and have a wealth of experience that practice fairly and honestly and economically for their clients. For these people a national certification requirement would be a good thing, but my sense is that any standards would be so watered down it wouldn’t matter.

That leaves us with the old adage “You get what you pay for.” And this is definitely the case with tax advice. Professionals who spend thousands of dollars on educational and research resources and who spend thousands more in un-billable personal time investing in their knowledge base will command a higher fee of their clients. If you insist on being cheap you might just see your tax preparer on the nightly news.

Joey Brannon is the founder of Axiom Professional Group, a tax, consulting and accounting firm in Bradenton, Florida. Mr. Brannon is both a CPA and an EA. You can find out more about Axiom by visiting www.axiomcpa.com.

Tangible Personal Property Tax in Florida

Today is the deadline for 2006 tangible personal property taxes. Most small business owners aren’t even aware this tax exists until they receive the form in the mail from their local property tax assessor. The forms are very simple and most of our clients with a limited amount of tangible assets choose to complete the returns on their own. So here’s the short version on what you need to know about tangible tax.

Many people assume the property appraiser’s activities are limited to valuing real estate for property tax purposes. However, Florida statutes direct the appraiser to value all property in the county including tangible personal property used by businesses. This means that desks, chairs, filing cabinets, computers, manufacturing equipment, and virtually anything else used by your business in its activities is subject to property tax. One important exception, however, is inventory. Inventory held for resale to customers is not taxed.

The Florida Department of Revenue produces form DR-405 that can be used to report the tangible personal property held by a business, but each county seems to have its own variation of the form. Manatee County for instance has taxpayers list all the assets on one master list regardless of their asset type. Sarasota County on the other hand uses the generic state form where assets of like type must be grouped together and summarized on page 1.

If you receive a pre-printed form from the county you must return it even if you are out of business or have sold all of your assets. If you do not file a form the county is likely to assess you a minimum amount of tax that in many cases is higher than the tax you would pay if you reported all of your assets at their fair market values.

Returns are due to the county April 1st or the first business day thereafter if the 1st falls on a weekend or holiday. The assessor updates the tangible tax rolls and submits them to the tax collector who issues a property tax bill later in the year. Tax rates are the same as for real property in the same jurisdiction. There is nothing equivalent to the homestead exemption for businesses, however, in Manatee County if the tax turns out to be less than $15 the tax collector won’t bother sending you a bill.

Here are a few other points you should be aware of.

• Tangible property you lease (copy machines, equipment, etc) must be reported and taxed.
  



• Property located in a rental unit (washers, dryers, appliances, furnishings) is taxable.
  



• Vehicles or trailers subject to registration in the county are not taxable.
  



• Some counties grant extensions to file the tangible return but you must often apply for an extension before the filing deadline. Extensions tend to be for only 30 days.
  



• The assessment is made at January 1 and you must report property you removed from the business during the previous year.
  



• If you sell your business you need to provide a copy of the bill of sale to your local property appraiser so they can remove you from the rolls and follow up with the new owner.
  



• Penalties for failure to file start at 5% per month and go as high as 25%.

Like I said initially, the tangible tax return is definitely something business owners can prepare themselves and many of our clients choose to go through the exercise as a practical way of updating their asset list each year. However, if you need help don't be afraid to give us a call.

Axiom Professional Group is a public accounting and consulting firm started by Joey Brannon in Bradenton, Florida. For more information you can view the Axiom Professional Group, P.A. home page   or visit the Axiom web site articles page (both links will exit the blog site).

Fractional Gifts of Art Work

Ric Gregoria of the Sarasota based law firm Williams Parker has written an interesting article on fractional interest gifts of artwork. This is a great technique for managing the limitations applied to charitable gifting and we've seen it produce much greater tax savings than if the piece of art were gifted outright to a musuem or university. Ric does a really nice job of concisely laying out the strategy.

Are vehicle registration fees deductible?

This question comes up most often with clients moving here from another state. They may be accustomed to deducting vehicle excise taxes and just assume their Florida registrations will be treated the same way. However, Florida's vehicle registration fees are usually based on weight and not the value of the vehicle. For that reason they are not deductible for Federal individual income tax purposes. The following is from the FAQ section of the IRS website.

12.7 Small Business/Self-Employed/Other Business : Income & Expenses

Are excise taxes for a vehicle deductible?

It has to be a personal property tax, not an excise tax, in order to deduct it. Deductible personal property taxes are only those based on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. To be deductible, the tax must be charged to you and must have been paid during your tax year. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions.

References:

• Publication 17, Your Federal Income Tax (For Individuals)
  



• Form 1040, Schedule A (PDF), Itemized Deductions
  

Axiom Professional Group is a public accounting and consulting firm started by Joey Brannon in Bradenton, Florida. For more information you can view the Axiom Professional Group, P.A. home page   or visit the Axiom web site articles page (both links will exit the blog site).