An important topic for American taxpayers is federal tax. It is essential to file federal taxes in a timely matter. April 15th is the regular deadline to file tax returns to the IRS. However, some taxpayers are unable to file by that deadline due to various circumstances. For cases like this, a request for an extension for more time to file can be submitted. If an extension is granted, this deadline is extended to October 15th in which the taxpayer is responsible to file. This is not an extension to pay for owed taxes. Negative financial consequences are a risk that taxpayers take when they fail to file by the extension deadline.
Filing taxes past the deadline or more than 60 days after the deadline, will incur different penalties. Failure-to-file penalty is one such penalty. Failure to file or failure to request an extension by the due date results in that penalty.
Late Filing Penalty and Interest Breakdown
The first penalty is failure-to-pay. For each month or part of the month a payment is late, the charge is half of 1% of the unpaid tax. On top of that payment, a 5% interest is charged and is compounded daily potentially reaching up to 25% of what is owed. A different penalty is applied when the taxes are filed more than 60 days after the deadline. Depending on which amount is less, the minimum owed is $210 or 100% of the unpaid tax. For example, if more than $210 is owed, the amount owed would be at least $210. If the total is less than $210, that total is what is owed.
Depending if a refund is owed or expected after filing a return will impact the penalty.
If a refund is owed to the IRS when filing after the October deadline extension, taxpayers can face severe penalties. The IRS can potentially file a substitute return if the taxpayer fails to file. Exemptions and deduction credits may not be given with a substitute return. Additionally, a Notice of Deficiency or a proposed tax assessment will be sent. If 90 days after the substitute return is filed and the taxpayer still fails to file the past-due tax, a tax bill will be issued by the IRS. When left unpaid, a collection process could be triggered which includes a federal tax lien or a levy on wages, bank accounts, and assets. A taxpayer’s credit score could be damaged as a long-term financial result. Additional penalties or criminal prosecution for tax evasion can be enforced under extreme cases such as repeated non-filing.
The penalty is less severe if the taxpayer is expecting a refund after filing. Nothing will happen in most cases. If penalties and interest are incurred, the amount owed would be deducted from the refund. To prevent a refund from being held, the taxpayer is responsible to file in three years and to file on time in the future.
There are simple solutions that a taxpayer can follow to avoid any penalties. Filing taxes as soon as possible is one of the simplest solutions. The taxpayer can expect their refund if it is expected. If taxes are owed, filing sooner would allow the taxpayer more time to negotiate lower payments. This would also allow for less penalties. Another simple solution would be to withhold more tax on your paycheck. This can potentially lead to a tax refund, and it ensures that the correct amount of taxes are being paid on time. If the taxpayer owes back taxes, the last solution would be to simply pay to avoid late payments penalties and interest.
There are options for taxpayers who may have difficulty paying taxes, penalties, or interest. If penalties and interests are incurred, taxpayers are given 21 days to pay. If qualified, a first-time penalty abatement can be offered to those who have a good history of filing and paying on time or have not accrued any penalties for the past three years. To help pay overtime, payment plans and agreements can be negotiated. Tax bills can be settled for less than what is owed with an offer in compromise. An extension past the October deadline can be granted in very rare cases and is normally reserved for military serving overseas.
The general idea is to be responsible and file tax returns in a timely matter by the regular April deadline or the granted October extension. This allows the taxpayer to avoid negative consequences.
If you happen to miss your tax extension deadline and are facing severe penalties from the IRS, you want to explore the option of Offer in Compromise, we at J David Tax Law may be able to help you. Know that peace of mind is just a click or call away.
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He is the founder and Managing Partner of J. David Tax LawSM. He is the winner of the 2019 Ultimate Tax Attorney awarded by the Jacksonville Business Journal. This award recognizes law firms and attorneys who show exemplary professional talent and skill while demonstrating superior client care, leadership, charitable concern, and civic engagement. Jonathan graduated from Chapman University School of Law. He has practiced law since 2011.
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