By Vera Wilson
July 15 was Tax Day 2020. As we all know, it was extended from the usual April 15 deadline because of the pandemic. Unfortunately, a not-so-small number of us let the deadline pass without taking any action at all.
I get it — you know you owe money that you can’t pay, so rather than file and face the ugly truth, you evade it by not filing at all.
But here’s the problem: If you don’t file, there’s a late-filing penalty. It’s usually a monstrous 5% of the taxes owed for each month (or part of a month) that your return is late, up to five months. If your return is over 60 days late, the minimum penalty is the smaller of $435 or 100% of the tax owed. The maximum penalty is 25% of the unpaid tax.
Compare that to the less costly late payment penalty, which is only .5% of the taxes owed for each month (or part of a month) that return is late. The rate increases to 1% after the IRS issues a final notice of intent to levy or seize property. The maximum penalty is 25% of the unpaid tax.
So let’s recap. Say you owe $2,000 and you file and pay four months out. You’ll owe $435 for filing late, but you’ll only owe $40 for paying late (plus interest). The definite takeaway is to file as soon as possible, even if you can’t pay. Don’t let incomplete information keep you from filing — you can always file an amended return. If you wait too long, the IRS will file a substitute return for you and send you a tax bill, which is usually higher than if you had prepared your taxes yourself.
Penalty relief is available. Check out the IRS website for reasons penalties can be waived. Interest on the amount due will be charged until you pay (rates vary over time), and it’s rarely waived.
Servicemembers may qualify for an extension to file and pay based on their military status. You must notify the IRS that your ability to pay has been materially affected by your military service. (See IRS.gov, Pub 30, Page 32.)
Don’t forget to take into account the penalties associated with not filing or paying your state-level taxes.
Sure you’re due a refund? No late filing penalties apply, so take your time, but not too much. You have three years from the due date to file.
Vera Wilson is freelance writer based in North Carolina. She frequently writes on financial topics.