When You Miss the Boat
by Bob Williams
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OK – you came running down the pier, financial baggage in hand, expecting to jump on the ship that leaves promptly on time. Your ticket requires a filed income tax return, but for whatever reason, you weren’t able to do that.
Maybe that W-2 you were banking on just didn’t show up in time; maybe your son at college decided to do his own taxes and you lost the exemption; maybe the time just got away from you. No matter.
What matters is, the S.S. IRS has pulled away from the dock. Now what? Jump in and start swimming? Maybe not, but you’re still going to get a little wet.
Here’s what to do.
File Now. NOW.
Not everyone who files late will get penalized. If your return gives you a refund, there’s no penalty if you file a late return. If you owe tax due, it’s a different story. You’ll probably owe interest and penalties on the taxes you pay late.
There are two types of penalty that late filers need to think about: failure-to-file and failure-to-pay. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, the IRS says taxpayers who file late can face a fine up to 10 times more than the penalty for just paying late.
The IRS fine structure makes it very advantageous to file on time, and failing that, to file as soon after the deadline as possible.
The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month (or part of a month) that a tax return is late. That’s capped at 25 percent of your unpaid taxes. Wait 60 days or more after the due date to file, and the penalty is either $135 or 100 percent of the unpaid tax, whichever is smaller.
By contrast, the failure-to-pay penalty is generally 0.5 percent (yes, that’s half a percent) per month on your unpaid taxes. Again, it’s time-driven, so it starts accruing the day after taxes are due. And it can build up to as much as 25 percent of your unpaid taxes.
If you haven’t filed and you didn’t pay, the combined failure-to-file and failure-to-pay penalties are capped at a total of 5 percent. That may not sound like much, but in five short months a tardy taxpayer has swelled their tax bill another 25 percent.
Time to Start Paddling
Continuing with our cruise ship analogy, while the ship has sailed, the IRS offers us a rubber dinghy and a paddle – for a price.
If you requested an extension of time to file by the due date, and paid at least 90 percent of the tax you owe, you may not face a failure-to-pay penalty. But you’ll have to pay the remaining balance by the extension due date. Interest will apply on the balance, however.
IRS-suggested payment options include getting a loan or paying the tax due by credit card. Many taxpayers can opt to set up a payment plan with the IRS using their Online Payment Agreement tool.
If you haven’t e-filed your return yet and you owe tax, the best advice is to file now and pay what you can now. Use one of the options we mentioned to take care of the remainder.
Time to get in your raft and start paddling, before that ship slips over the horizon.
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