The old saying goes there are only two certainties in life: Death and Taxes.
We know we can’t cheat death, but did you ever wonder what happens if you file your tax return late? Or even worse, you don’t file your tax return at all?
Frankly, I’m too scared to find out what would happen if I didn’t file my taxes. Just in case you ever flirted with the idea, here are the penalties you face from the IRS.
If you already missed the boat, here are some options if you missed the tax deadline.
Warning: You don’t want to mess with the IRS. Depending on the nature of the actual return, you are either faced with paying interest or even worse, penalties. Consider, at least, filing a tax extension.
Do you need some help filing your taxes this year? If so, here is a list of my favorite tax preparation softwares to make the process easy and straightforward for you:
Interest When You File Tax Return Late
Interest on underpayments or over-payments runs from the extended due date of the tax return, i.e. April 15th of any given year. Regular interest is set by statute, but underpayment incurs a 1% premium rate, compared with the rate of interest that will be paid by the IRS on over-payments or refunds.
Basically, expect to be paying more interest in you owe money to the IRS, versus if you paid too much. If you are owed a refund, you’ll still earn interest on the amount entitled to you, just at a lower interest rate. It’s kind of like getting a loan from a bank versus how much they pay in their savings accounts.
Penalties When You Don’t File Tax Return
Penalties may be categorized as failure to file or failure to pay penalties which will automatically be assessed by the IRS, and as an underpayment that is related to some negligence or intentional fault of the taxpayer.
The failure to file or (FTF) penalty is assessed by the IRS at a rate of 5% per month or partial month up to a 25% maximum. The failure to pay (FTP) penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% maximum. If both the FTF and FTP penalties are assessed, the FTF penalty is reduced by the FTP penalty.
Example: A taxpayer files her a return 39 days after the due date. Along with the filing of the return, she remits a check for $6,000, which is the balance of the tax owed. Therefore the total FTS and FTP penalties are $600, computed as follows:
- FTP penalty, .5% times $6,000 times two equals $60.
- FTF penalty, 5% times 6,000 times two equals 600.
- FTP penalty penalties run concurrently minus $60. Total penalties, FTF, and FTP equal $600.
The FTF penalty of $600 is reduced by the FTP penalty of $60 making the adjusted FTS penalty $540. Then adding the FTP penalty of $60 still due even though it reduces the FTF penalty makes up a total assessed penalty of $600. Still confused? If so, the easiest way to avoid this is to pay your taxes!
As mentioned there are also underpayment penalties owing to some fault of the taxpayer. However, there are also the following penalties, listed in order of their severity.
- Criminal fraud. This is simply tax evasion, which is illegal. If convicted of this penalty the taxpayer will be subject to heavy court determined fines, imprisonment or both (see pic below for an example).
- Civil fraud: This is essentially taxpayer fraud that does not rise to the level of criminal fraud. If imposed, the penalty is 75% of the portion of the tax underpayment attributable to fraud.
- Negligence: This accuracy-related penalty is imposed if any part of the underpayment, due to taxpayer neglect, or to disregard of the tax rules and regulations without the intent to defraud. The penalty is 20% of the portion of the underpayments attributable to the negligence.
- Frivolous Return: A frivolous return is one that omits certain information necessary to determine the tax payer’s tax liability, such as her Social Security number. Usually, such a return is filed by a protester who is attempting to pester the IRS and make its job more difficult. The penalty is $500 for each frivolous return filed.
Filing Tax Return Late Example
Let’s look at another example. Charles filed a timely tax return but is later required to pay an additional $15,000 in tax. This amount, 6,000, is attributable to the tax payer’s negligence. The negligence penalty will be a 20% penalty applied to the negligent component. Therefore, the total amount of penalty imposed on Charles is $1,200. 6,000 times 20%.
Don’t Forget The Tax Extension
If it’s getting close to the wire and you still don’t have all your tax information together, you still can file a tax extension. The key to the extension is paying an estimated tax in the event that you owe. If you haven’t paid any tax throughout the year, or not enough; then the same interest and penalties would apply.
If you can’t pay your taxes, you still have options. As a last result, you could pay your tax with a credit card. Don’t assume it’s as convenient as it sounds.
How Do You File Taxes After It’s Too Late?
When you finally realize that you haven’t filed your tax return, it’s best to file sooner than later (obviously). You’ll want to collect all your tax documents for the years that you didn’t file. Yes, that’s a lot of paperwork to collect, but remember that you are dealing with IRS. The more you can find the better.
- If you filed an extension AND paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.
- SPECIAL CIRCUMSTANCES: You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
If taxes seem like advanced chemistry to you, then hire a tax professional (CPA preferred) to help you through the process. Be ready to pay some or all of the back tax that is owed. If you can’t afford it immediately, you should be able to strike a deal with the IRS. Remember, the IRS is not a “four-letter” word. They will work with you if you show you are willing to cooperate.
File Your Tax Return and Avoid the Headache
Failing to file a tax return and pay your respective tax bill can be of serious consequence. There are have been many high profile cases of individuals who failed to pay their appropriated tax bill.
If the big names can’t cheat the IRS, why do you think you’ll get away with it? Just ask our man Wesley.
Moral of the story: File your return and pay your taxes.
How to File Taxes on Time
Not filing a tax return is a terrible idea unless you want to hang out in prison with people who never filed their taxes like Wesley Snipes.
Avoiding that fate is pretty simple, fortunately. All you need to do is get your documentation together and file your taxes before the tax filing deadline goes by.
You could print off the tax forms from the IRS website, grab a pen and your favorite calculator, and get to work on calculating your return. But why would do that with so many great software options available to not only file an accurate tax return but also guaranteeing you get your maximum return?
Here is a great option:
TurboTax is the leader in filing your tax return with software. You used to have to buy TurboTax at a retail store, but they have grown their web tools significantly and you can file your return 100% online. (You also get the option of downloading the software to your computer or using their mobile and tablet app options as well.)
TurboTax comes in several editions:
- a free edition for Simple / 1040EZ Returns
- a Deluxe edition which is the best option for most individuals and families
- a Premiere edition for those with investments and rental property
- and a Home & Business edition to knock out both issues at the same time
Simply select the version that best fits your needs — hopefully, you need Premiere because you’ve been investing for your future — and the software asks you questions along the way to fill out your tax return.
It’s incredibly simple and can save you hundreds of dollars compared to using an accountant. Plus, TurboTax comes with an Audit Support Guarantee so you don’t have to face an audit alone.
I know several people that still feel antsy over using TurboTax and would prefer a more traditional tax service. Well, you cannot get more traditional than H&R Block. What sets them apart from TurboTax is that if you have a serious problem you can always save off your work and head down to a local H&R Block office. The availability of that support makes them a great option.
H&R Block editions include:
- Free edition for simple federal tax returns
- Basic – great for people have slightly more complex returns.
- Deluxe – for most people this has the best value of features
- Premium – Geared toward small business owners and those with rental property.
Once you are on the site you can select which version meets your needs. If you are not sure you can start with the free edition and work out which edition ends up being the best for your needs as you go.
The whole process is very well broken down and filing with H&R Block gives you the comfort of the larger brand,