We here at LateTax have already written about all the reasons for filing late income taxes if you are due a refund. (You could get money back! With no penalties!) But what happens if you are filing a late tax return and you aren’t expecting a refund? Should you still file?
The answer is yes. Alas, the picture is not so rosy for you as it is for those late filers who will be rewarded with a nice chunk of change for their belated effort. The best you can hope for is limiting the amount you owe in penalties and interest. That’s right, if you owe money, there are penalties for filing and paying federal taxes late.
First, let’s break down the different types of late tax penalties. This nastiest of the IRS penalties is a failure-to-file penalty which occurs – you guessed it – when you fail to file a return at all. This penalty amounts to 5% of whatever you owe for each month the return is late, up to a maximum penalty of 25%.
The next kind of penalty you could incur is a failure-to-pay penalty. You get hit with this charge when you fail to pay the taxes you owe, whether you’ve filed or not. This penalty is far less harsh than the failure-to-file penalty, amounting to 0.5% of the taxes you owe for every month they’re not paid in full.
Finally, on top of the penalties, you are also responsible for paying interest on your late taxes. Interest rates change every 3 months. Currently they are set at 3% per year.
The moral of the story is that it’s better to file late than never. It’s best to file even if you can’t pay all of the tax due because the failure-to-file penalty is a whopping 10 times greater than the failure-to-pay penalty. The IRS will work with you to find a way for you to pay. They would far rather do this than have you avoid filing altogether.
Another lesson to be learned is that if you owe, it’s better to file sooner than later. Every day that you avoid filing or paying, penalties and interest accrue and your tax debt gets larger and larger.
Another great reason to submit a late return is to make sure you claim all the exemptions, credits, and deductions you’re entitled to. If you avoid filing, the IRS can file a substitute return for you using information culled from other sources.
In all likelihood, this substitute return will not be completely accurate and will not include many of the exemptions, credits, and deductions that can save you money. The only way to ensure you receive these potential savings is to file your own late return, in which case the IRS will adjust their substitute return and correct the figures.
And let’s not forget, the IRS can take even more drastic steps. If your taxes remain unpaid, the agency can force you to sell or mortgage your assets or take out a loan to cover your tax liability or it can directly levy your bank accounts, wages, and other income. Furthermore, a Notice of Federal Tax Lien could be filed, negatively impacting your credit.
It’s unlikely that your situation will ever reach such a point, but why run the risk? And why subject yourself to added penalties? Get started on your late tax return as soon as possible and you can mitigate the financial damage and lift a burden off your shoulders at the same time.