Filing Late? Here's A Checklist of IRS Penalties
In 2021, Americans will need to file their tax return and pay any income taxes that are due by April 15. You can file without penalty at any point up until this deadline, however, it is important to make sure that you don't miss the filing deadline. If you do, and don't pay your tax bill by this date, significant penalties can apply.
The following is a list of the penalties for not filing on time:
Failure-to-File Penalty for Late Filing
A failure-to-file penalty applies to anyone who files taxes late. This might be after the April deadline or, for people who have applied for an extension, after an extension due date.
The failure-to-file penalty is typically 5% of all unpaid taxes for every month or partial month after the due date until the IRS receives your tax return.
The failure-to-file penalty starts accumulating the day after the April deadline or if an extension is filed, the day after the October deadline (usually October 15th).
If you file your tax return more than 60 days past the April deadline or your extension date, the minimum penalty you will pay is $135 or 100% of the unpaid tax (whichever is smaller). This penalty is limited to 25% of your unpaid tax.
Failure-to-Pay Penalty for Late Payment
If you don't pay any taxes owed by the April tax deadline, you may also incur a failure-to-pay penalty.
This penalty typically costs 0.5% of your unpaid taxes for every month or partial month your payment is overdue. The failure-to-pay penalty also accrues from the day after the April deadline. However, if you're supposed to pay both a failure-to-file penalty and a failure-to-pay penalty in any month, the failure-to-pay penalty may be waived.
You might notice that failure-to-file penalties are 10 times greater than failure-to-pay penalties. For this reason, it's important to always file your tax forms, even if you can't pay your tax bill at the time you file.
Reducing and Avoiding Failure-to-File and Failure-to-Pay Penalties
There are a number of ways to reduce or avoid IRS penalties for late filing and late payment:
- File and pay your taxes before the April deadline. This is the most obvious way to avoid penalties. File using a paper form or electronically using a service like E-file.com. If you have a busy lifestyle, you may want to file your tax form well before this deadline to ensure that you're organized. Preparing your return early will also help you be aware of your anticipated tax bill so that you can budget accordingly.
- Get an extension from the IRS. While you can't get an extension on paying your taxes, the IRS will grant extensions on filing tax paperwork. This must be granted before the April deadline, so make sure you file an application early if you think you won't have time to file your taxes. Otherwise you'll still incur the failure-to-file penalty. If you request a filing extension and pay at least 90 percent of your taxes owed, you may avoid a failure-to-pay penalty as well as the failure-to-file penalty, providing all taxes are paid by your extended due date.
- Make a partial tax payment. Don't think that because you can't pay your taxes in full, you shouldn't pay anything. Pay as much as you can by the due date. This will reduce the amount of your failure-to-pay penalty.
- Explore other payment options. You could get a loan or use a credit card to cover your taxes or make an installment agreement with the IRS.
- Prove reasonable cause for not filing on time. If you can prove to the IRS that you have a good reason for not filing your tax form or paying your taxes by the deadline, you can sometimes avoid the penalties. The IRS has historically shown leniency towards taxpayers who are victims of natural and man-made disasters, including terrorist attacks and serious storms. Serving members of the Armed Forces and American citizens working abroad may also have strong cases for not filing on time.
Interest Charges for Unpaid Taxes
The IRS will also charge you for the interest it would normally receive on the tax you haven't paid. Interest compounds daily and is calculated from the date your return is due until the date your taxes are paid in full. The interest rate is re-calculated every quarter by adding 3% to the federal short-term interest rate. The federal short-term interest rate typically stands between 1% and 4%, so you can expect to pay between 4% and 7% more than your total tax bill in interest.
Late Filing of Returns with Refunds
If you're getting a tax refund, you won't receive any penalty for filing late so long as you file your tax forms within three years of their deadline.
However, if you wait longer than three years you will forfeit your unclaimed tax refund. This money will become the property of the U.S. Treasury and cannot be reclaimed.
More Serious Penalties
If you continually fail to file and pay your taxes, the IRS has the power to attack certain assets through the Federal Payment Levy Program. The IRS must notify you of intended action before following through. If you do not respond between 30 and 60 days, the IRS can legally take serious steps, including:
- Seizing your Social Security.
- Taking out a federal tax lien on property you own (house, car, income, bank account).
- Commencing court proceedings. If you're found to have willfully failed to file your tax returns, you could serve jail time.
Filing your tax return by the April deadline is the easiest way to avoid penalties from the IRS. If this is not an option, filing for an extension and paying your entire tax bill before the April deadline is also a good way to avoid penalties. Even when you cannot pay your entire bill, it is important to file your return or extension on time.
Q&A: Can the IRS take all the money in your bank account?
In extreme circumstances, the IRS can issue a levy on your property to help satisfy unpaid tax debts. This includes money in your bank account, as well as funds in your retirement account. The IRS can also seize physical property, like your car, in order to sell and pay off tax debt.
Fortunately, there are several steps that must occur before such drastic actions take place. The IRS must first send you a Notice and Demand for Payment regarding your tax bill. If you don't pay it, then they're required to send you a Final Notice of Intent to Levy, plus a Notice of Your Right to a Hearing. These documents must be sent at least 30 days in advance of a levy being issued.
You can avoid a levy by settling your tax debt or by setting up a payment plan with the IRS.