*This isn’t tax advice, consult a tax professional if you have any questions.*
What are the Consequences of Filing Taxes Late?
After the last two years of extended tax deadlines – May 17 in 2021, and July 15 in 2020 – you might be forgiven if you forget that taxes are actually due in April.
The Internal Revenue Service (IRS), however, will not.
That said, even in 2022, filers get a little bit of a break on the deadline. Due to when the weekend falls, and the observation of the Emancipation Day holiday in Washington, D.C. on April 15, you actually get until April 18 this year. And if you live in Maine or Massachusetts, you get another day on top of that, due to the observation of the Patriot’s Day holiday on April 18 in those two states.
But that’s it.
What Happens if You File or Pay Your Taxes Late?
So what happens if you fail to make that deadline? Even by just a day?
It depends on whether you file late or pay late – or both. It makes a difference.
Taxes are owed by the deadline regardless of when you file, even if you get an extension. So if you file your taxes on time, but don’t pay the taxes that you owe on time, you’re accruing interest and penalties.
That said, if the IRS owes you money, it won’t charge you a penalty – other than the fact that it has your money. If you file your taxes late, that delays when you can get your refund. You’re also missing out on other money you might be eligible to receive, such as the Earned Income Tax Credit (EITC) or a Premium Tax Credit. And here’s a nuance – if you hold a security clearance, failure to file your taxes – even if you’re owed a refund – could lose it.
“Ordinarily, the failure to file penalty is 5% of the tax owed for each month or part of a month that a tax return is late, up to five months, reduced by the failure to pay penalty amount for any month where both penalties apply,” the IRS writes. “If a return is filed more than 60 days after the due date, the minimum penalty is either $435 or 100% of the unpaid tax, whichever is less.”
How about paying taxes late? “The failure to pay penalty rate is generally 0.5% of unpaid tax owed for each month or part of a month until the tax is fully paid or until 25% is reached,” the IRS writes.
That said, “If you negotiate an installment plan, the penalty rate is cut in half to 0.25%,” writes LifeHacker. “Eventually, the IRS will issue a notice that they intend to seize property to satisfy the bill, and ten days after that, the penalty rate increases to 1%. If you filed for an extension and missed that deadline, the penalty jumps to 5%.”
On the other hand, if this is your first time, you get a certain amount of leeway. “Taxpayers who have a history of filing and paying on time often qualify for penalty relief,” the IRS writes. “A taxpayer will usually qualify if they have filed and paid timely for the past three years and meet other requirements.”
What if you just don’t have the money? File your taxes anyway, so that at least you’re not accruing those penalties, and then see what you can work out with the IRS. “If you can’t pay the full amount of your taxes or penalty on time, pay what you can now and apply for a payment plan,” the organization notes. “You may reduce future penalties when you set up a payment plan.”
How to File an Automatic Extension?
Fortunately, there’s an easy way to avoid all those unpleasantness (aside from filing and paying your taxes on time in the first place): You can file an extension, form 4868. You can file it online, or on paper. And best of all, you don’t have to make any excuses about why you haven’t gotten around to filing your taxes. Just fill out the form and you get an automatic extension until October 17 (again, due to a weekend; normally it’s October 15).
And that’s all the extension you get. You can’t file another extension in October and get another six months.
Remember, filing the extension doesn’t change the fact that you still are supposed to pay the tax by April 18. How are you supposed to know how much you owe if you haven’t filed your taxes yet? Make your best guess, based on factors such as how much in taxes you had withheld. The closer you are, the smaller your penalties and interest will be. And as long as you get within 90% of what you owe, you won’t be charged a penalty at all.
Remember that filing your taxes late delays when you receive your tax refund and payments such as the EITC, if any. If you wait three years or more before filing your taxes, you’ll lose the ability to receive that tax refund or EITC at all.
In fact, if your taxes are late enough, the IRS will file a tax return for you, and then tell you how much it thinks you owe – but it won’t bother looking for factors such as exemptions and tax credits that you would normally be able to use to lower your tax bill. That’s called a substitute return.
Also, if you’re self-employed and don’t file your taxes, the income you earned doesn’t get applied to your Social Security account, which has the effect of reducing your benefits later. In addition, if you apply for a mortgage or other type of loan, they will typically want to see your most recent tax returns.
The IRS can also garnish your wages, and seize your property, such as refunds you’re owed, other government payments like Social Security that you would normally receive, bank accounts, your car, and even your house.
It gets worse. If the IRS thinks you’re actually evading taxes, it can put you in jail. But the good news is, that doesn’t happen very often, according to the nonprofit organization Upsolve. “Lucky for you, the IRS rarely uses criminal prosecution against taxpayers,” it writes. “The IRS doesn’t have the resources to criminally prosecute every non-filer. So, when it uses the criminal laws against a taxpayer, they make sure it’s for a high-profile reason or there’s a large tax debt involved. In this way, the prosecution gets maximum coverage. Other taxpayers see these prosecutions unfold and it motivates them to file their taxes to avoid going to jail.”
Finding a Tax Professional
You don’t have to handle this yourself. Just like you may take your car to a mechanic to be serviced, or hire a lawn service to mow the grass, you can turn to professionals. The IRS has a lot more details on this.
In fact, in some cases, they might even be free. The IRS offers a service called IRS Free File which, just like the name says, helps you file your taxes for free. If your adjusted gross income (AGI) is $73,000 or less, it hooks you up with an IRS partner; if your AGI is more than $73,000, it gives you the online equivalent of the basic 1040 form. It doesn’t give you any guidance, however. IRS Free File can be used only for the current tax year.
Even if services are not free, you may find that the amount of money they save you in preparing your taxes might pay for itself, or even more. Remember, they’re professionals.
These days, “professionals” can also mean computer software, running either on your own computer or in the cloud. You give the software all the information, and it knows what exemptions and deductions you’re eligible for. Just be sure that you update your software each year so it has the most current information.
Other services let you come in and work with people in person. This time of year, they’re easy to spot; they’re the businesses featuring people dressed up as the Statue of Liberty holding a sign and dancing, or an inflatable character, in front of the office. Just bring in your shoebox of receipts and forms and they can help you out.
If your taxes are complicated enough, such as if you’re self-employed or have a lot of investments, you may want to hire an accountant who can help you all year with aspects such as estimated taxes. If you hire a particular kind of accountant, a certified public accountant (CPA), they can even represent you to the IRS if you were to get audited.
Hardly anybody really likes doing taxes – except for, maybe, accountants. But just like going to the dentist, it doesn’t get better by putting it off. And by the way, have you been to the dentist lately?