What to do if you are late on filing your taxes

Some good news for procrastinators: If you’re owed a refund and you don’t file your taxes by Tuesday, you won’t get hit with a penalty.

This has always been the case, but many people don’t realize it. The IRS is champing at the bit to get its tax revenue. It’s less concerned about doling out refunds to people who haven’t claimed them yet.

So if you are absolutely sure you’re owed a refund, you won’t get in trouble if you miss the filing deadline.

But if you’re wrong and you actually owe money, you’ll need to fork over a fine. By both failing to file and failing to pay on time, you will incur a maximum penalty of 5% for each month after the deadline. If you’re more than 60 days late, you’ll be fined $135, or 100% of the unpaid tax — whichever amount is smaller.

To avoid even the chance of being hit with these penalties, it’s always safer to file on time. Or you can file for a six-month extension if you’re feeling pressed for time — which simply requires filling out Form 4868. But remember, even if you get an extension, you still have to pay 90% of the tax owed by the filing deadline.

“Filing by the April deadline can save you from an unexpected surprise,” says Lynn Ebel, tax attorney at the Tax Institute at H&R Block. “If you wait to file … because you ‘know’ you are getting a refund and then find that you miscalculated and actually owe money, interest and penalties will have accrued on your debt [by the time you do file].”

And if you wait too long, your refund will become the property of the government. After three years, you can no longer claim a refund. This year, the IRS announced that more than 900,000 people still haven’t claimed refunds worth a total of $760 million from 2011. After April 15, they can no longer retrieve the funds.

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What paperwork to keep after taxes are completed

For most of us, the drudgery of tax filing season has drawn to a merciful close. Now what do you do with all that paperwork?

In general, taxpayers should keep a copy of their tax returns and supporting documents — everything from receipts for charitable donations to mileage logs to paperwork showing payments for mortgage interest and property taxes — for a minimum of three years from the tax-filing deadline.

Typically, that’s how long the Internal Revenue Service has to initiate an audit.

The agency has longer — generally up to six years — to initiate an audit in cases of fraud, say when a taxpayer fails to report a big chunk of income.

“Enrolled agents say keep all tax records for seven years just to be safe,” said Kim Lankford, contributing editor and columnist with Kiplinger’s Personal Finance magazine.

Ms. Lankford recommends keeping actual tax returns indefinitely, which includes 1040 forms and main supporting forms such as Schedule A for itemized deductions and Schedule B for interest and dividend income. Keeping those documents could help in a jam, she said.

“They can provide clues to all kinds of things years in the future for things you might not have thought of,” she said.

For example, applying for disability insurance or a mortgage may require records verifying income going back a number of years.

“[Historical] information that you can get from the IRS is limited,” she said.

Ms. Lankford said keeping old tax returns helped one of her colleagues successfully contest her Social Security benefits statement.

“It showed she hadn’t earned as much as she had in one year. She was able to produce her very old tax form and get credit,” Ms. Lankford said.

People who don’t want to keep any paper records can scan the originals and keep them in a digital archive, she noted.

While most supporting tax documents can be safely pitched within three to six years, there are some that should be kept longer. Those include records relating to real estate, stock and mutual fund transactions, retirement accounts and business or rental property that help set a cost basis.

For example, it’s good practice to keep records of the purchase price of a home and the cost of any major home improvements.

“You generally aren’t taxed on home-sales profits if you’ve lived in the home for at least two of the past five years and your profit is less than $250,000 if single or $500,000 if married filing jointly,” Ms. Lankford said.

But for anyone living in a home for a shorter time or having a bigger profit, adding major home improvements — not basic repairs — to the cost basis of the home can reduce the taxable gain.

Anyone getting ready to throw out tax-related or other personal documents should take care to do it the right way to limit their exposure to identity theft.

“ID thieves know this time of year people are going through records,” Ms. Lankford said. “They can piece [personal] information together from your trash, even if you rip it up.”

The IRS recommends that paper documents get cross-cut shredded into strips not exceeding 5/​16 of an inch wide, or burned.

For magnetic records, the agency generally recommends a combination of overwriting and degaussing, followed by incinerating, shredding, pulverizing or grinding.

One option besides using a home shredder is to take advantage of special shredding days offered in some communities around tax time, Ms. Lankford said.

This year as in past years, Office Depot is offering a coupon to shred up to 5 pounds of documents for free through April 29. A pound of paper is roughly 1/​2-inch thick. Coupons are available online, although some stores don’t require the coupon — www.officedepot.com/​speciallinks/​us/​od/​docs/​taxcoupons_shredding.pdf).

“A lot of people end up keeping a lot more paperwork than they need to because they are worried,” Ms. Lankford said. “Knowing the rules helps people feel more comfortable about getting rid of things.”

For more details about what to keep and what to pitch, see IRS Publication 552, Recordkeeping for Individuals, available at www.irs.gov, or by calling 1-800-829-3676.