You probably don't need us to remind you that it's that time of the year again - tax season. If you filed your 1040 with the Internal Revenue Service (IRS) for this year's federal taxes soon after you received your W-2, 1099s, and year-end financial investment statements, well done. If the weather allows it where you are, enjoy a stress-free Spring day.
If you're instead a member of the large group that hasn't filed taxes yet and is watching the filing deadline - whether it's the usual April 15th or later - zooming ever closer, don't panic. While the deadline is near, options are available for taxpayers who are not quite ready to file their tax return by the due date. Knowing which one is the best way for you to file taxes can save you money and stress.
Doing Nothing? Not a Great Idea
If you're one of the filers owed a tax refund, there's no good reason to delay if you're ready to file your tax documents. Unfortunately, the government will not pay interest on the money they owe you. Getting your taxes in by the deadline means getting your money back where it belongs - in your account - more quickly.
The government has up to three years to assess your taxes, a statute of limitations known as an Assessment Statute Expiration Date (ASED). It rarely takes that long. If you're owed money on your return, you also have a Return Statute Expiration Date (RSED) of three years from when you filed or two years from when you paid the tax. If you don't file by your RSED, you may forfeit your owed refund.
Not filing taxes by the deadline can become an expensive problem that starts before the IRS notices start flowing in. The IRS will assess a Failure To File penalty for unfiled taxes. This is usually 5% of the unpaid taxes for each month or part of a month that your return is late. This can add up quickly, but the maximum penalty is 25% of your unpaid tax bill. If you file more than 60 days late, the minimum penalty is either $435 or 100% of the unpaid tax, whichever is less.
It's not difficult to get a filing extension from the IRS to avoid a late filing penalty. This gives you until October 15 of the same year, but it's important to understand what that means. While your tax filing isn't due until then, any money you owe in additional taxes is still due on the original deadline. An extension gives you more time on your tax filing deadline but not more time to pay what you may owe. You'll need to estimate what you owe and pay that at the deadline.
If you get an extension but don't pay the amount you believe you owe, the IRS will apply a Failure To Pay penalty. The terms for a late payment penalty are typically 0.5% of your unpaid taxes for each month or part of a month that you're late. This penalty can also go up to 25% of your unpaid taxes.
Those who don't file or pay on time face monthly charges of 5% instead of 5.5% as the two aren't compounded. The IRS also charges interest on the total tax amount owed. The rate changes every three months and usually comes in at the 3%-6% range.
Making Up for Lost Time
If you've gone longer than one year but less than three tax years without filing, you can still file to pay what you owe in back taxes. The late charges and penalties will still apply, but you don't have to worry about facing tax evasion charges if you take care of it.
If you have paid your taxes on time for at least the three previous years before missing the deadline, relief for filing back taxes may be available through the IRS's first-time penalty abatement policy. Your clean record can help you avoid paying penalty fees.
Asking for Assistance
Owing additional tax debt is not something anyone looks forward to, especially those who lack the funds to meet the requirement. If this is the case, it's far better to contact the IRS about alternate payment options. These methods include an offer in compromise and installment plans.
While interest and penalties will still accrue on the unpaid amount of owed taxes with an installment agreement, the penalties do so at a reduced rate. Either option is better than not filing or paying at the deadline.
The IRS has the ability to seize the assets of those who are delinquent on what they owe in taxes. It can also garnish wages, take funds from bank accounts, and place liens on owned properties.
It Wasn't My Fault!
In some instances, the IRS will make allowances due to extraordinary circumstances. Being hospitalized is often considered a satisfactory reason for not filing on time. Natural disasters can also provide justification to avoid penalties for missing the deadline.
Those claiming circumstances beyond their control as rationalization for not filing an income tax return should be prepared to prove it to the IRS.
Knowing When You're In Over Your Head
Filing yourself for free is always an option, and more and more states are adopting systems to help with that process. It's also okay to admit that your taxes may be too complex to get done in time on your own, calculating what to pay if you're self-employed is too confusing, or that you may require assistance figuring out a payment plan for money owed.
In those tax situations and others like them, it's a good idea to consider reaching out to a tax expert for help. Aid for determining tax payments and tax preparation can be found through a certified public accountant (CPA), a tax professional, or a tax attorney. Their familiarity with tax laws and requirements means that their expertise might be a financial boon for you.
You can also e-file and find assistance on the IRS website.
Related Resources
- Which Tax Form Should I Use? (FindLaw's Tax Laws and Forms)
- Determining Tax Filing Status (FindLaw's Federal Tax Law)
- State Tax Laws (FindLaw's Individual Income Tax Law)
