Penalties are assessed when a taxpayer fails to file their income tax return on time and, if necessary, fails to pay taxes on time. Those who cannot complete income tax returns by the normal due date, usually April 15, can request that the due date be extended for up to six months.
By April 15, they must still pay an estimate of the taxes they owe. There may also be penalties for failure to pay taxes in full if the estimate is lower than what the person actually owes.
What Is the Penalty for Failure to File a Tax Return?
Those who fail to file their income tax return on time, and do not request an extension, will be assessed a penalty of 5% of their tax liability per month for up to 5 months.
What Is the Penalty for Failure to Pay Taxes?
Taxes that are not paid on time will be assessed a penalty of 5% of their tax liability per month. However, the total penalty cannot exceed 25%.
It is also known as the failure-to-file penalty or the late-filing penalty. Tax returns that are more than 60 days late are subject to a penalty of $435 or the amount of tax owed, whichever is lower.
However, there is good news. You might not owe the penalty if you have a reasonable explanation for filing late. The IRS has more info on ways to apply for penalty relief here.
A Distinction to Note
Late-filing penalties are different from late-payment penalties. Late-filing penalties apply to people who fail to file their Form 1040 or other important tax documents on time. Late-payment penalties apply to people who pay their taxes late. For each month your outstanding taxes remain unpaid, you will be charged 5% of the unpaid tax amount, including interest.
If You’re Due a Refund, the Failure-to-File Penalty Doesn’t Apply
You typically have just three years to claim a tax refund. If you get a refund on your tax return, there is usually no penalty for failing to file.
Avoiding a Failure-to-File Penalty
To avoid the penalty for not filing taxes, if you’re going to miss the tax-filing deadline, you should get an extension to file. With a tax extension, you can get an extra six months to file your tax return.
However, remember that an extension only gives you more time to file your tax return. It does not extend your tax payment deadline. Natural disaster victims, certain military members, or Americans living abroad may automatically get more time to file.
If you miss the tax extension deadline, however, you may have to pay a failure-to-file penalty.
How Long Can You Go Without Filing Your Taxes?
You’re taking a big risk. The government usually has six years to charge you with tax evasion, but it has forever to collect taxes you owe and assess penalties. These things could happen to you when the IRS catches up to you, in addition to the failure-to-file penalty:
- Failure-to-pay penalty: If you don’t pay your taxes by the deadline, the IRS can penalize you 5% of the unpaid balance every month, up to a maximum of 25%.
- Interest: In addition to the failure-to-pay penalty, interest accrues on your unpaid taxes.
- Substitute returns: You may receive notification by mail that the IRS has filed a return on your behalf if you fail to file but the IRS has some information needed to calculate your taxes, such as your W-2 form. This won’t include any tax credits, deductions, or other tax breaks you may have taken if you’d done your taxes.
- Possibly missing refunds: You may be owed money. The IRS usually gives you a three-year window in which to file previous years’ returns. Once this window ends, you forfeit your tax refund.
Is it Still Possible to File a Tax Return and Receive a Refund/Pay Taxes Owed?
You should file your tax return and submit your tax payment as soon as possible to avoid late filing and payment penalties. Tax refunds can only be claimed three years after the original due date. After this date has passed, the money goes to the Treasury. Don’t become another statistic! Submit your previous year’s tax return as soon as possible. Even if you don’t expect to get a tax refund, you should consider filing a previous year’s return.
Is There a Defense to Avoid Paying These Penalties?
- Inability to Pay: Laying a foundation that the taxpayer is, in fact, unable to pay may give them a jury instruction to this defense. Paying other bills before paying a tax bill or forgetting to pay and giving away assets will not suffice to meet this defense.
- Negligence or Failure to Pay Was Not Willful: If a taxpayer can show that the failure to file and to pay taxes was due to reasonable cause and not willful neglect, then penalties may be waived. In general, it is not enough to prove that the person acted in good faith or was ignorant. It must be demonstrated that the taxpayer exercised ordinary business care and judgment but still failed to file or pay taxes on time or that doing so will cause them undue hardship. A taxpayer may rely on an expert’s opinion as a defense to the penalties, but the expert’s opinion must be based on enough relevant facts that the taxpayer discloses to the expert.
What If You Cannot Pay the Taxes or Penalties You Owe?
If you are unable to pay at least 90% of the taxes you owe by the original tax deadline, you are likely to owe penalties. What can you do when the balance due keeps increasing? To the extent of your financial ability, pay your due tax and, at the very least, file your return or extension as soon as possible.
Solution 1: Find alternate methods of payment
If you pay your tax bill using a credit card or a loan, the interest may be less than the IRS penalties.
Solution 2: Apply for an IRS Payment Agreement
To arrange a payment plan with the IRS, you have three options:
- Obtain a short-term extension of time to pay,
- Set up a payment plan, or
- An offer-in-compromise can be made.
Do I Have to Pay Penalties If I Have Filed for Bankruptcy?
It depends. Bankruptcy courts have equitable powers to abate tax penalties but not reduce them entirely. The court can either remove these liabilities completely or impose them on the bankrupt taxpayer.
Do I Need an Attorney?
Tax laws are complex and frequently change. Although there are various tax preparation programs on the market, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can.
Tax lawyers can assist you if you have any questions about your tax penalties or need representation before the IRS. You do not want to get into tax trouble with the IRS. Do everything you can to avoid tax penalties and late fees. If you run into tax problems, please do yourself a favor and use LegalMatch to find an experienced tax attorney in your area.