The Cost of Filing or Paying Your Taxes Late

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All too often, the April 15th 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 IRS which defers your tax return filing deadline until October 15th. 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 don't file your tax return by the April 15th deadline and fail to 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 5 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!

 

Paying on Time

Section 6651(a)(2) of the federal 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 extension for paying your tax bill after April 15th, if you can't file on time, you should pay the amount you estimate will be due along with your extension filed no later than April 15th. 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 15th deadline and you pay your taxes late, you will be charged both the late filing and late 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 late filing 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!

Extenuating Circumstances

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 written IRS advice

Remedial Actions

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 15th. If it’s not possible to pay the full amount there are a few options:

  • Set up a payment plan

  • In a few special cases, you might be able to make an offer for a settlement, or Offer in Compromise

  • In severe cases where you have far too much debt, including tax debt, you might have to file for bankruptcy

It's important you review all IRS notices and bills in detail. Inaction on your part to file and/or pay your taxes could 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.

William D. Truax, E.A. and his friendly team of licensed tax preparers have been helping individuals manage their tax payments and penalties for over 30 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.

If you need assistance or have questions about a notice you’ve received or penalties you may owe, please contact us today for a FREE consultation. We’re here to help!