All too often, the April 15 Federal tax return deadline arrives sooner than expected – causing frustration and anxiety as you scramble to get everything together at the last minute. Yes, a six-month extension is available from the Internal Revenue Service which defers your tax return filing deadline until October 15. However, taxpayers will still be responsible for paying late penalties on the unpaid tax that was due earlier in the year as well as any unpaid taxes from prior years. The bottom line is, extension or not, failure to file and pay your taxes on time can be a very costly decision!
Filing on Time
If you fail to file your tax return by the April 15 deadline or request an extension, you will be assessed a penalty. For every month or fraction of a month your tax return is late, you will be charged 5% of the net amount that you owe for the year. The maximum penalty you can be charged is 25% of the amount owed. At 5% per month, the maximum penalty would be reached after 4 months. If you filed within the original or deferred tax deadline, there would be no late filing penalty. But let’s say you filed seven months past the deferred deadline and owed a tax bill of $50,000. You would end up having to pay a penalty of 25%, or $12,500, in addition to the $50,000 you already owed. That’s no small chunk of change! And that's just the federal penalty. Individual states also charge late filing penalties of their own, and some can be higher (as a percentage of tax due) than the federal penalty.
Paying on Time
Section 6651(a)(2) of the tax code specifies the deadline to actually pay your tax liability due for the year. If you fail to pay the balance owed for the year, you will be subject to a penalty of 0.5% for every month or fraction of a month that the tax payment is outstanding. The total penalty is capped at 25% of the total tax due but that penalty will keep mounting every month until you reach the maximum penalty (in about 50 months). Since there is no deferment for paying your tax bill after April 15, it is advisable to pay the amount you estimate will be due no later than April 15. Failure to pay also applies to outstanding back taxes from every year, so small fees can quickly turn into very large amounts.
Applying Late Penalties
If you file after the April 15 deadline and you pay your taxes late, you will be charged both filing and payment penalties for each month or fraction of a month they are late. Fortunately, if you are subject to both penalties simultaneously in any given month, the IRS grants a reduced penalty of 4.5% (5% - 0.5%) for that month only. The maximum penalty amount still stands at 25% for each of the two violations. If you delay paying the tax owed and accrue the maximum penalties for both, you can be liable for a combined 47.5% (25% + 22.5%) in late fees. Using our example above, if $50,000 in tax is due plus the maximum late penalty fees, that would amount to a total penalty of $23,750 or $73,750 in taxes owed!
There are extenuating circumstances the IRS recognizes as legitimate reasons or “reasonable cause” for not filing by the deadline. These are:
The death or serious illness of the taxpayer or a member of the taxpayer’s immediate family when that taxpayer had sole authority to file the tax return.
The destruction of the taxpayer’s business records or place of business by fire or other casualty.
The unavoidable absence of the taxpayer responsible for filing the return or inability to obtain the necessary records.
The reliance by the taxpayer on erroneous oral or written IRS advice.
The best thing to do is file your taxes and pay the amount due by the filing date. That means apart from extenuating circumstances, the tax owed is due to be paid by April 15. If it’s not possible to pay the full amount there are a few options:
Set up a payment plan
Make an offer for a settlement, or Offer in Compromise
In severe cases, file for bankruptcy
Inaction on your part to file and/or pay your taxes may also result in a tax levy where the IRS can seize your assets in lieu of payment for back taxes. The IRS can even garnish your wages in order to recover a tax debt, leaving you with only enough to support basic living necessities.
If you need assistance or have questions about filing and paying your taxes on time, please contact us today for a FREE consultation. No matter how awful it seems, there's always something which can be done about it. The longer you wait, the more you may owe!