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A Special Alert for the October 15 IRS Filing Deadline.


Although not as universally traumatic as April 15, the October 15 final extension deadline looms over the heads of procrastinating taxpayers like a

financial Sword of Damocles. This year the pre-Halloween nightmare includes the specter of traditional stiff penalties for late filing and, for the first time, a potentially gruesome trick-or-treat predicament faced by some taxpayers relying on what they thought were tax-saving Roth IRAs.

Penalties for late filing and late payment:

If you applied for an extension but don't file a return by October 15, for each month beyond that date, you are subject to a failure to file penalty: an additional five percent per month to a maximum of 25 percent on the amount of your unpaid taxes. If you have an extension, file on time, but owe more than 10 percent of your final tax, you face a failure to pay penalty of one-half percent per month for the balance due. In addition, the IRS charges interest on any unpaid balance at current applicable federal rates.

What's the best course of action if you simply don't have the money to pay your taxes? Mail the return anyway, since the penalty for late filing is 100 times worse than the penalty for late payment. Then arrange a payment plan. And if you're stuck without enough money to pay both state and federal taxes, pay as much as possible to the California Franchise Tax Board first. State sanctions can actually be more severe than IRS penalties.

Convert ROTH IRAs now to avoid an unexpected tax hit:

Introduced in 1998 as an innovative tax advantage for taxpayers with adjusted gross incomes of less than $100,000, Roth IRA accounts are designated "tax-free" after taxes are paid on the initial deposit. A step up from tax-deferred savings, future earnings in Roth IRAs are not taxed at all, thus allowing the account to deliver a maximum yield in years to come.

The Roth concept enticed many people to convert from traditional IRAs -- until the market took a downturn. As a result, some Roth IRAs dropped appreciably in value, although they will still be taxed this year based on the original amount converted.

Additionally, if your income in 1998 turned out to be greater than $100,000, you no longer qualify for a Roth and will need to withdraw your funds or face a penalty tax.

The way out of these situations? Quickly change back to a traditional IRA. Fortunately, people who have already filed -- as well as those who have yet to file -- are eligible to convert, or in IRS lingo "recharacterize," their IRA before the October 15 deadline.

After consulting with their CPA, taxpayers who wish to take advantage of this option should ask the financial institution maintaining the account to make the switch. This involves some time and paperwork, so don't expect to smoothly accomplish a conversion late on Friday afternoon. Start now and allow at least a couple of days.

Deadline for SEP and profit-sharing Keogh plan contributions:

October 15 also marks the final deadline for contributions into a SEP (Simplified Employee Pension) or a profit-sharing Keogh plan. It's not generally advisable to wait until the very last minute, but you can deposit funds into these plans as late as Friday, if necessary. Remember these accounts offer valuable tax-deferred savings for the self-employed, but there are strict ceilings on yearly contributions. Check with your CPA to determine exactly how much money you can put into your SEP or Keogh.

More information:

For additional details about IRS penalties for failing to file or pay taxes, Roth IRA conversions, SEPs and Keogh plan contributions, contact Paul von Beroldingen at (415) 751-1858 or Curt Olsen at (650) 802-2493 to arrange for background information or interviews with local CPAs.

Online resources:

CalCPA online ( has tax news, money management articles and related links, plus Find a CPA Online, the most comprehensive free online directory of CPAs in California. This database, which is searchable by geographic location, language, service niche and industry expertise, makes it easy for visitors to identify local CPAs who match their needs.
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Publication:Business Wire
Date:Oct 13, 1999
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