We all know when you should do your taxes: early in the year, as soon as you can get all the documentation together. You’ll have an easier time getting in to see an accountant, if you’re using one, plus you’ll have extra time to work with if any challenges arise. But nobody’s perfect all the time, and it may be that one year you don’t get your taxes done by the deadline. What happens then? Here’s what happens if you file taxes late and what you can do about it.
Late Filing Penalties
Good news: you won’t be facing jail time because you got your taxes in a little late. Instead, it’s a matter of cash penalties. The other good news is that these penalties are assessed relative to the amount you owe in taxes. So if you know you are due a refund instead of owing money, congrats—you will not owe a penalty. However, you can’t get your refund until you file, so it’s time to get started.
If you do owe money to the IRS, there are penalties. Of course, if you haven’t filed, you may not know whether you owe or how much. So you’ll need to do your taxes to know exactly what you will owe. Even if you lack some of the documents you will need to file, you can estimate your taxes without them.
There are two penalties, one for failing to file and one for failing to pay. Failure to file is 5% of your total tax bill monthly, whereas failure to pay is only 0.5% of your tax bill. However, if you owe both, they are reduced such that you will still owe only 5% in total for every month you’re late. If you don’t pay your penalties, they will accrue interest as well. These penalties are capped at 25% of your tax bill.
How to Avoid Tax Penalties
The obvious way to avoid paying tax penalties is to file your taxes on time. But sometimes, this simply isn’t possible. If you know you will be late, file for an extension right away. You can file for an extension any time up to midnight on tax day.
An extension gives you six more months to file, so you can file as late as October. However, it’s best to still file the moment you have all the documents you need. You can’t get a second extension for the October deadline.
You request an extension using form 4868. Getting the extension is automatic—you don’t need to wait to see if they approve it. If you use tax software, you can submit your extension request through there, or your accountant can do it for you. Another option is simply to pay what you estimate you owe through the IRS portal and check the box saying it’s for an extension.
Now, it’s important to understand that your extension only gives you more time to file. They still want you to pay now. This means you’ll have to estimate what you owe and pay that amount. So long as what you pay is at least 90% of what you actually owe, you won’t owe a penalty. If you overpay, they will refund you. If you don’t know what you might owe, it’s a good idea to estimate on the high side. But, as the failure-to-pay penalty is only 0.5% monthly, underpayment will not hurt you as much as filing your taxes late without an extension.
How to Get Penalties Removed
If you missed the deadline and also didn’t file an extension, you may be feeling a sense of doom. What happens now? Will you owe a huge pile of money for your late taxes?
In many cases, these penalties can be removed. When you receive a letter from the IRS saying you owe a penalty, don’t panic. Instead check if all the information on it is correct. If not, follow the directions in the letter to correct it. If it is, but the reason you didn’t file taxes was beyond your control, you can apply for penalty relief.
There is a toll-free number at the top right of your letter which you can call to request relief. They may be able to approve your relief right then over the phone. If not, or if you can’t get through, you can request relief in writing. Use Form 843 and mail it to the IRS. If your penalty relief is approved, you will also have any interest it’s accrued relieved as well.
If your penalty is not removed, it’s time to set up a payment plan with the IRS. Even if you can’t pay the whole sum at once, you can reduce your penalties by reducing the amount you owe.
You’re Not a Failure
It’s easy to feel ashamed when you file your taxes late. Taxes feel like something every adult should be able to do. But taxes are legitimately difficult, and the more complex your situation is, the harder it is for an individual to keep track of it all. Hiring a professional to help with your taxes isn’t very expensive and it’s often well worth the cost. You’ll save yourself both the headache and costly penalties.To meet the right professionals for every area of your financial life, contact us today. We’ll listen to your situation and find you the person with the expertise you need.