In a perfect world, taxpayers file their returns on time, and if they owe the IRS any money, they pay estimated increments during the year (for businesses) or they pay their total bill at the time of filing.
In the real world, things don’t always work that way. For any number of reasons, a taxpayer might be unable to pay his or her total tax bill for a given year. For probably fewer reasons, a taxpayer might all together forgo filing a tax return or file it after the due date. The former is fairly common, and the IRS will be cooperative, to an extent. The latter is no good in almost every case.
Late (or non-) filing
Sometimes a person will not file her taxes because she knows she can’t pay what is owed. What this individual doesn’t understand is, the IRS assesses penalties against unpaid tax balances and for returns filed after April 15 (or whatever the agreed due date is). And the penalty for late filing is typically 10 percent higher than the penalty for unpaid balances.
Normally, the penalty for late filing is 5 percent of the unpaid balance per month, not to exceed 25 percent of your total tax liability for the tax year in question. If you wait to file for more than 60 days after the due date, the minimum penalty is going to be $135 or 100 percent of your unpaid tax, whichever is smaller.
So the answer is simple: file your tax return, even if you can’t pay the full amount owed. File even if you can’t pay a penny. This way you at least avoid fees for late filing.
If you file your tax return on time but fail to pay all that you owe, penalties will be assessed at a rate of 0.5 percent of the balance per month. This penalty begins accruing on the day your tax payment is officially late – April 16, for most people. The maximum penalty is 25 percent of your owed balance.
The smartest move is to always file your taxes, even if you can’t pay the total of what you owe. A partial payment is better than no payment, and you might find some ingenious ways to accumulate more money to send in with your return. The IRS suggests taking out a loan or putting some of your balance on a credit card.
If you know you won’t be able to file your taxes by April 15, or if you can file but you can’t pay, consider requesting an extension. The IRS usually grants this request, giving you an additional six months.
But remember – an extension only “protects” you during those six months. If taxes aren’t filed and payment is not made in full by October 15, penalties will begin to accrue.
Go to IRS.gov for more information on this and other related subjects.
There are many facets to the topics of late filing and partial payment of taxes. W. Cotton Mather of Pittsburgh can help. Our team of tax and accounting specialists will work with you through consultation and expert tax preparation for both business and personal tax returns. To arrange an appointment, or for more information, call (412) 931-1617.