Federal tax is an important topic for Americans to understand. Filing federal taxes in a timely manner is just as important, if not more. The regular deadline to file tax returns to the IRS is on April 15th. However, under various circumstances, some taxpayers are unable to file by the deadline. If this is the case, taxpayers request an extension for more time to file. This deadline is typically on October 15th. Once granted a tax extension, taxpayers are responsible for filing by that deadline. As a note, this extension is not an extension to pay for taxes owed. If taxpayers fail to file by their extension deadline, they run the risk of negative financial consequences.
There are different penalties for filing taxes past the deadline or more than 60 days after the deadline. One of the penalties is the failure-to-file penalty. According to the IRS, this penalty is assessed when the taxpayer fails to file or fails to request an extension by the due date for unpaid taxes.
The breakdown of the penalty and interest for filing late is as follows:
The failure-to-pay penalty is half of 1% of the unpaid tax for each month or part of the month the payment is late. The interest is 5% for each month or part of the month that the tax return is late and is compounded daily. This rate can potentially reach up to 25% of what is owed in taxes. If the taxes are filed more than 60 days after the deadline, the minimum owed is $210 or 100% of the unpaid tax, whichever amount is less. This means if the amount owed totals less than $210, that amount is what is needed to be paid. Moreover, if the amount owed is more than $210, at least $210 is what is needed to be paid.
The consequences vary depending on if a refund is expected or if taxes are owed after filing.
Taxpayers who owe the IRS after filing can face severe penalties when filing after the October extended deadline. If the taxpayer fails to file a return, the IRS can potentially file a substitute return for the taxpayer. With this substitute return, deduction credits and exemptions may not be given. A proposed tax assessment, Notice of Deficiency, will also be sent. Failure to file the past due tax return 90 days after the substitute return is filed, the IRS will have no choice but to issue a tax bill that can potentially trigger a collection process if the tax bill is left unpaid. Collections may include a levy on wages, bank accounts, and assets, or a federal tax lien can be filed. This can lead to more long-term financial consequences such as damage to the tax payer’s credit score. For more extreme cases such as repeated non-filing, additional penalties or criminal prosecution for tax evasion can be enforced.
For taxpayers who are expecting a refund after filing, the penalty is much less severe. More than likely, nothing will happen. If interest and penalties are incurred, the IRS would deduct that out of the refund that is owed. Although the penalty is less severe, it is the taxpayer’s responsibility to file the return in three years to receive a refund. It is also the taxpayer’s responsibility to file on time to prevent a refund from being held.
To avoid any penalties, there are some simple solutions a taxpayer can follow. The first solution is to file taxes as soon as possible especially if a tax refund is to be expected. Filing sooner would also allow for the taxpayer to have more time to negotiate lower payments if taxes are owed. Fewer penalties may also be accumulated. Another solution would be to increase the tax that is being withheld on a paycheck. This can ensure that the proper amount of taxes are being paid on time and can potentially lead to a tax refund. The last solution for the taxpayer is to simply pay what is owed to avoid incurring late payment penalties and interests.
For taxpayers who may have difficulty paying any taxes, penalties, or interests, there are options that can help. Taxpayers are given 21 days to pay any penalties and interests that may have been incurred. For those who have a good history of filing and paying on time or have not been assessed any penalties for the past three years, first-time penalty abatement can be offered to those who qualify. Payment plans and agreements can be negotiated to help pay what is owed overtime. Offers in compromise can help settle tax bills for less than what is owed. In more rare occurrences, another extension past the October deadline can be granted but this is typically reserved for military taxpayers who are serving overseas.
Whatever the situation may be, taxpayers still hold the responsibility of filing their tax returns in a timely manner whether it be on the regular tax deadline in April or the extension in October. Keeping up those deadlines will help taxpayers from running the risk of facing negative consequences.
If you are facing severe penalties from the IRS for missing your tax extension deadline or want to explore how an offer in compromise may be able to help your case, peace of mind is just a click or call away.®
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