It’s April 19, and most Americans should have submitted their tax forms yesterday, except Maine and Massachusetts residents.
Of course, life isn’t that straightforward. Every year, between the formal end of tax season and the end of the year, around 20 million individual tax returns come. Some taxpayers will have filed an extension, while others may have simply put off the pain of filing papers, only to be hit with a hefty financial penalty.
When you owe money on your taxes, putting off the dreaded filing process can cost you hundreds of dollars in penalties. If you expect to owe money but haven’t filed yet, here are the many penalties and costs you could face – and how to avoid them.
Penalties for “failure to file.”
People frequently put off completing tax returns out of fear of not being able to pay what they owe. Martin Davidoff, a partner at accounting firm Prager Metis, believes this is a mistake.
“People say things like, “Oh my my, I can’t pay, so I’m not going to file.” That is the worst thing that has ever happened to me, “According to Davidoff. “If you don’t file, you’ll be subjected to considerably more severe fines.”
The IRS imposes a penalty of 5% of the tax payable for failure to file, which is applied each month the tax return is late.
According to the IRS, the minimum penalty is $435 or 100% of the unpaid tax, whichever is less, if a return is filed more than 60 days after the due date.
Late fees are subject to penalties.
There is a penalty for paying late, although it is less severe than the penalty for failing to file. The liability for late payments is also determined by the amount of tax you owe compared to what you’ve already paid.
“If you underpaid, the IRS would want interest,” Davidoff added. The IRS currently charges a 4% annual interest rate on any unpaid taxes, compounded daily.
“In addition to the 4 percent per year penalty, there’s a half-percent-per-month penalty if you pay them less than 90% of your tax liability,” Davidoff explained.
According to Davidoff, if a taxpayer does not pay at least 90% of the tax owed by the April deadline, “you’re basically paying 10% per year in non-deductible interest and penalties,”.
Make a request for an extension and pay what you can.
Because the IRS imposes the worst penalties for failing to submit taxes, the IRS advises individuals who cannot pay the total amount they estimate to owe to file their forms nevertheless — or file an extension — and deliver what they can.
“Taxpayers considering missing the filing deadline because they can’t pay all of the taxes they owe should file and pay what they can to avoid interest and penalties,” the agency says.
CPAs urge taxpayers to make an attempt to figure out what they owe and pay what they can. Betterment’s tax head, Eric Bronnenkant, recommends that consumers use the prior year’s taxes to estimate how much they may owe.
“Start with your prior year as a method to develop some sort of realistic estimate of whether your past year is a decent barometer for your current year,” Bronnenkant told CBS News recently. “Perfect should not be the enemy of good enough.”
Even if you missed the deadline, filing as soon as possible saves you money in the long run.
“The problem is that [the penalty is] every month. It’s per month, whether you’re one day late or 30 days late, “Davidoff stated. “So get your tax return in by May 15th. Even if you cannot pay, you will have the return submitted by that date.”
If you file an extension, how much interest will you owe?
Taxpayers who file an extension and owe money will still be charged interest, but they will not be penalized. Here’s a simple illustration of the distinction.
If a taxpayer owes $2,000 in taxes and does not file for an extension, they will be charged a failure-to-file penalty of 5% of the entire amount owed for each month they are late, plus 4% interest compounded daily.
So, if the same person files their return in July, three months after the April deadline, they will owe an additional $300 in late fees and $20 in interest, for a total of $320 in late fees and interest, on top of the $2,000 tax bill that started the problem.
That person would still be liable for an underpayment penalty and interest if they filed an extension and paid their taxes three months later, but the sentence would be less than $50 — for less than the cost of not filing.
What happens if you owe a refund?
If you are owed a refund, there are usually no penalties for filing it late, but you only have three years to collect it.
“You lose your refund if you wait too long to file a refund return,” Nina Olson, founder of the Center for Taxpayer Rights and former National Taxpayer Advocate, explained. “So, even if you got a refund from one year that you could use to another [year when you owe taxes], if you wait too long to file that return, you won’t be able to apply that refund to your back-tax obligation.”
Read More:- Extensions, Stimulus Credits, and Other Last-minute Inquiries About the IRS Tax Deadline Answered!
