Don't Mess With Taxes

Aaron Zeff had no idea he was a tax delinquent until two IRS agents showed up last week at his Sacramento car wash.

The amount the IRS says Zeff didn't pay back in 2006: 4 cents.

So the IRS sent two people to collect four pennies?

Actually, the bill was a bit bigger. Over the last four years the unpaid tax debt had grown to $202.35 thanks to interest and penalty fees.

Zeff thought he had paid all taxes due from his business, Harv's Car Wash. And he has no idea how that 4 cents the IRS says he didn't pay grew into more than $200.

But the California businessman needs to talk to Peter Pappas, who pens the Tax Lawyer's Blog. Pappas notes that the IRS didn't just use the unpaid four cents as the basis for its penalty and interest calculations. Zeff's full, original tax bill likely was the starting point for its computations that produced the eventual $200-plus amount.

"There's no malice here," Zeff told the local ABC affiliate News10. "(The IRS is) interested in doing their job and I'm just interested in staying in business."

To top it off, Zeff is turning his tax trouble into something good for others. On April 15 Harv's will charge only 4 cents for basic car washes.

Customers do have the option to pay more, with any excess to be donated to a Sacramento shelter for victims of sexual assault and domestic violence.

The price of penalties: While the personal appearance of two IRS employees to collect on a relatively small overdue bill got a lot of attention, it does underscore the reality of how tax penalties can add up.

I'm not sure if the California car wash situation prompted it, but the IRS just released a list of Nine Things You Should Know about Penalties. They are:

1. If you do not file by the deadline, you might face a failure-to-file penalty.  
   
2.  If you do not pay by the due date, you could face a failure-to-pay penalty.
   
3. The failure-to-file penalty is generally more than the failure-to-pay penalty. 
   
4. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.  
   
5. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. 
   
6. You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. 
   
7. If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date. 
   
8. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.  
   
9. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

The bottom line is that if you can't pay Uncle Sam what you owe, go ahead and file your tax return anyway. That way the penalties and interest won't accrue as quickly while you look for ways to pay your IRS bill. 

Related posts:

• Paying off your taxes incrementally
• 'Rangel Rule' would nix penalties and interest on back taxes
• A national tax amnesty is the answer

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