The tax day deadline was 1 month and 11 days ago. And I am so glad that tax season is over! I love my clients, I really do. But I prefer to handle my clients tax needs January through April each year.
Why? Filing late has financial consequences for most taxpayers. Applying for an extension does NOT give you an extension to pay. So here’s the good, bad and the ugly about filing late.
The Good: If you are due a refund there is no penalty if you file a late tax return. That’s it! Nothing more to see here.
The Bad: If you owe tax, and you failed to file and pay on time (by April 15th), you will usually owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. But there’s more to it. Filing late gets ugly.
The Ugly: The IRS has the right to charge you penalties and interest when you owe taxes and file after April 15th.
Here’s the low-down about penalties and interest:
1. The first penalty doled out is the failure-to-file penalty for late filing. This penalty is can be between 5%-25% of your unpaid taxes.
2. The second given is the failure-to-pay penalty for paying late. Just like the failure-to file penalty, it is between 5%-25% of your unpaid taxes.
3. If you file your return 61 days after April 15th (without an extension filed) or October 15th (with an extension filed), there is a minimum late filing penalty, which is the smaller of $135 or 100% of the unpaid tax.
4. If you manage to file and pay your taxes after April 15th, you will subject to a late payment penalty. This penalty is 0.50% of unpaid taxes per month, with a max of 25%. The penalty starts calculating as of April 16th.
5. If you cannot pay your tax bill in full, you can apply for an Installment Agreement. But you will be charged an interest rate of 8% of the life of the agreement. The IRS will give you a maximum of 72 months to pay.
The Moral of the Story: Plan ahead and pay all of your federal income taxes on or before April 15th. If you don’t, the IRS can put you in the slammer. But that is the very last resort!
The IRS offers the recommendations for those who file and pay after April 15th:
File even if you can’t pay. In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. The IRS will work with you to help you resolve your tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.
Late payment penalty may not apply to you. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.
No penalty if there is a reasonable cause. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014.
Jéneen R. Perkins is a freelance accountant and is fluent in plain English, not “Accountant-ese”.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and answers to tough tax questions posed to Jéneen R. Perkins, Owner of Eclat Enterprises, LLC