Worried about filing taxes late? We will walk you through each situation you may have and look at what options you may have. Don’t know what penalties you may owe the IRS?
Here’s a quick look at the penalties you may incur:
- Failure to pay: 0.5% up to 25%
- Failure to file: 5% up to 25%
So, as you can see, you are much better off filing than not. The penalty is ten times worse for those who fail to file their tax return at all. However, it’s important to note that if you miss the filing deadlines, your federal tax payment is still due on July 15th. (Normally April 15th but an extension was given in 2020 due to COVID-19).
We will also go over the options you have if you cannot pay on time. Being on time is important to the IRS, so communicate with them if you are not going to be paying or filing your taxes on time.
Missing Tax Deadlines: When Penalties May Apply
There are two types of penalties that the IRS may hit you with. The penalty for not filing your taxes by the due date is 5% per month, but it does cap out at 25% of your unpaid taxes. The penalty for not paying your taxes by the due date is .5% per month, but it also does cap out at 25% of your unpaid taxes.
If you owe taxes and do not file your tax return or extension on time, you will incur penalties. You will also owe the IRS interest and possibly more fees depending on your circumstances. There are many things to take into consideration when it comes to penalties.
Summary of Penalty Situations with Basic Action Steps to Take
The following table is a summary of each tax situation and the actions you should take if it applies to you.
| Did File | Did Not File | Did Extend | Did Not Extend | Refund Expected | Owe Taxes | Action Summary |
|---|---|---|---|---|---|---|
| X | X | File Now | ||||
| X | X | Pay Now | ||||
| X | X | X | File & Pay Now | |||
| X | X | X | File within 3 Years | |||
| X | X | X | File by Oct. 15 & Pay Now | |||
| X* | X* | X | File & Pay Now | |||
| X | X | X | Talk to the IRS |
*Tax Return was rejected
Detailed Explanation of Penalty Situations with Action Steps to Take
1. If you did NOT file your tax return on time but are due a refund, understand the following:
- You must file a tax return to get a refund.
- You have 3 years to file your tax return and claim a tax refund.
- After 3 years, you will no longer be able to claim a tax refund.
Action Step to Take: File your tax return as soon as possible (within 3 years) or you will not get your refund.
2. If you DID file your tax return on time but did NOT pay in full, understand the following:
- You will have to pay the Failure-to-Pay penalty which is .5% of the balance due for each month your taxes go unpaid to a maximum of 25% of your unpaid taxes.
Action Step to Take: Pay what you can as soon as you can or contact the IRS to let them know if you are unable to pay in full; ask about entering the IRS Installment agreement or other qualifying assistance program that they have available for taxpayers with unexpected tax debt.
3. If you did NOT file your tax return or tax extension on time AND you owe unpaid taxes, understand the following:
- You will have to pay both penalties: the Failure-to-File penalty and the Failure-to-Pay penalty.
- The Failure-to-File penalty is 5% of the tax balance due for each month your taxes are unpaid to a maximum of 25% of your unpaid taxes. If greater than 60 days late, the penalty will be 100% of your unpaid taxes or $210, whichever is less.
- The Failure-to-Pay penalty is .5% of your unpaid balance due for each month your taxes are unpaid, but the penalty will not be greater than 25% of your unpaid taxes.
- If both penalties apply during the same month, the Failure-to-File penalty is reduced to .5% per month. The 25% maximum applies to both penalties together.
Action Step to Take: File your tax return as soon as possible online (recommended); after October 15, you can file if you have an extension. It’s recommended you pay some or all of your taxes as soon as you can.
If you are not able to pay some or all of the taxes you owe, talk to the IRS; ask about entering the IRS installment agreement or other qualifying assistance programs that they have available for taxpayers with unexpected tax debt.
It may be time to look into alternative ways to pay the IRS (friends, family, cash-out employer benefits, bank loan, etc.).
4. If you DID file your tax return or tax extension on time and expect a refund or owe the IRS nothing, understand the following:
- You must file a tax return to get a refund.
- You have 3 years to file your tax return and claim a tax refund.
- After 3 years, you will no longer be able to claim a tax refund.
Action Step to Take: File your tax return by April 15 or your extension by October 15 (or within 3 years) to get your refund as soon as possible.
5. If you DID file your tax return or extension on time but did NOT pay the taxes you owe, understand the following:
- Pay at least 90% of the balance you owe when you get an extension.
- You may have to pay the payment penalty.
- The Failure-to-Pay penalty is .5% of your unpaid balance due for each month your taxes are unpaid, but the penalty will not be greater than 25% of your unpaid taxes.
Action Step to Take: File your tax return by October 15 if you have an extension. Pay as much as possible as soon as you can.
If you are not able to pay some or all of the taxes you owe, talk to the IRS; ask about entering the IRS installment agreement or other qualifying assistance programs that they have available for taxpayers with unexpected tax debt.
It may be time to look into alternative ways to pay the IRS (friends, family, cash-out employer benefits, bank loan, etc.).
6. If you DID file your tax return or tax extension on time, but your tax return was rejected and you do not file another tax return and you owe taxes, understand the following:
- You will have to pay both penalties: the Failure-to-File penalty and the Failure-to-Pay penalty.
- The Failure-to-File penalty is 5% of the tax balance due for each month your taxes are unpaid to a maximum of 25% of your unpaid taxes. If greater than 60 days late, the penalty will be 100% of your unpaid taxes or $210, whichever is less.
- The Failure-to-Pay penalty is .5% of your unpaid balance due for each month your taxes are unpaid, but the penalty will not be greater than 25% of your unpaid taxes.
- If both penalties apply during the same month, the Failure-to-File penalty is reduced to .5% per month. The 25% maximum applies to both penalties together.
Action Step to Take: File your tax return and pay as soon as possible.
7. If you have a reasonable cause for not filing your tax return or paying the taxes owed on time, understand the following:
- You will get hit with both penalties: the Failure-to-File penalty and the Failure-to-Pay penalty.
Action Step to Take: Communicate with the IRS to see if you qualify for one of the IRS payment assistance programs. Discuss with them your reasons for not filing to discover what options you may have (e-File, 2020).
Keep in mind that each circumstance is different. These are the 7 basic situations that most taxpayers fall under and the action steps should give you the next steps to take, and it’s recommended to take them as soon as possible in order to avoid further penalties, fees, and/or interest.
General Advice for IRS Penalties
If you’re dreading filing your taxes, because you know you owe a large sum of money, at least take the first step, and submit your tax return. The IRS tacks on steep penalties for those who do not file their federal tax return. While you can file for a 6-month extension, you still only have until April 15 to pay the amount you owe.
If you are unable to pay, work out a payment agreement with the IRS. The 120-day installment plan offered by the IRS comes with no set-up fees and allows you to extend your payments. However, penalties and interest will still accrue until you are paid in full (Hatzakis, 2020).
Conclusion
Failing to file or pay your taxes can be a big problem. The best thing to do is to file your income tax returns on time and pay your taxes as soon as you can. The IRS does have payment assistance programs that may help if you owe the IRS money you were not expecting to pay. You may want to investigate why you have to pay unexpected taxes so that it doesn’t happen to you next year.
Not sure whether you owe taxes or not? When in doubt, consult with a tax specialist. Check out these steps to finding a tax accountant if you don’t already have one. Do you need tax or accounting assistance? We can help you with every part of your taxes.
We specialize in tax returns, financial planning, and more. To see how we can help out with your tax returns, contact us today! Borshoff Consulting can help you with one-on-one audit assistance, support, and representation. You can trust Indiana’s Tax Expert!
