Paying taxes and filing the annual tax return is not most people's favorite activity. Sometimes life gets a little crazy and taxpayers forget their obligation to file or pay the tax due on their return. However understandable this situation may be, it is not without consequences. There are two penalties that apply to a late or unpaid return.
Late Filing Penalty
April 15th is normally the deadline to file a personal tax return, however taxpayers can file for a 6-month extension if necessary. Should a taxpayer fail to file by April 15th without filing an extension, or exceed the extension by filing after October 15th, they will be subject to a late filing penalty. The penalty for failing to file your tax return is normally 5% of your unpaid tax for each month or part of a month that the return is late. There is a limit to the penalty and it will not exceed 25% of the unpaid tax. However, if the return is more than 60 days late the minimum penalty is the lesser of $135 or 100% of the unpaid tax.
For example, Carlton did not file for an extension and did not file his tax return until April 30th. The total unpaid tax was $500. His failure to file penalty would be $25 ($500 x 5% x 1 Month). If Carlton had not file his return until June 30th his failure to file penalty would be $135. Because he filed the return more than 60 days after the due date, penalty minimum rules apply. If there was not a minimum rule his penalty would have been $75 ($500 x 5% x 3 Months).
If a taxpayer does not have a balance due, then even if the return is late, there is no late filing penalty.
Late Payment Penalty
Even if a taxpayer files an extension, if they owe tax on their return they may be subject to a late payment penalty on any unpaid tax after April 15th. An extension gives a taxpayer more time to file NOT more time to pay the tax. The late payment penalty is .5% per month or part of a month that the tax is unpaid. It is limited to 25% of the unpaid taxes. If a taxpayer requests an extension and has paid 90% of the total taxes owed, they may not be subject to the penalty.
Let's assume in our above scenario that Carlton did file an extension and then filed his return with a payment for the unpaid tax on April 30th. The late payment penalty would be $3 ($500 x .5% x 1 Month rounded up). IF his unpaid tax was $3,000 and he paid on June 30th his penalty would be $45 ($3,000 x .5% x 3 Months).
Our example, only includes the penalty for a late payment. Be aware that late payments will also be subject to interest.
If a taxpayer owes both the failure to file and the failure to pay penalty, the maximum amount charged in those months is 5%.
It is recommended that taxpayers make sure to file on time even if they cannot pay the tax. The failure to file penalty is 10 times more than the failure to pay penalty. If a taxpayer cannot pay the whole amount of tax due they should pay as much as they can to reduce penalties. After their initial payment, taxpayers may use IRS online resources to apply for a short extension to pay, set up an installment agreement, or suggest an offer in compromise. If you can show reasonable cause for late filing and payment the IRS may waive your penalties.
No one likes to pay penalties, so it is a good idea to stay organized and plan ahead. If you think you may owe tax and want to avoid surprises or start planning for any additional tax due, consider contacting your tax preparer for a tax plan. A little time and money now could save you a lot latter.