Taxes are the lifeblood of an economy. Whether you believe this or not, everyone is under a social contract of paying the state for the services it renders and offers. It is a duty for everyone. But a nightmare for some who fails to comply with the filing dates and payments.
For those who once been penalized, and for those who are yet to face costly penalties, have you seriously considered what it costs to file your taxes late? Or worse, not file your taxes at all?
If not, you’re lucky to read this as we are going to take a tour around the penalties for filing taxes late or shall we say a tour around the preposterous nightmare of late filing of taxes.
When is Tax Penalty Applied: Punishable Tax Returns Offences
There are two traps a taxpayer may fall into: first is the failure to File the income tax return and second the failure to pay income tax return.
Failure to file or the (FTF) is considered worse than Failing to Pay (FTP). The IRS advises to file your taxes even if you can’t pay in full and within the due date. We can surmise that the IRS might construe FTF as evading taxes, that’s why it is important to file your taxes (as a sign of good faith, that indeed you’re willing to pay).
1. Failure to File Income Tax Return (FTF)
The IRS imposes a penalty of 5% per month or partial month not exceeding 25% of unpaid taxes fro FTF. The penalty starts accruing the day after the deadline. If the filing exceeds 60-days after the deadline or tax extension, the penalty will be “the minimum penalty… the smaller of $135 or 100 percent of the unpaid tax.“
An example will suffice to illustrate this more clearly, but brace yourself as we are going to do a little math.
Reese owed $3,500 of taxes and filed his tax returns 33 days after the deadline. She will be fined 5% of $3,500 twice because she is late for the first month and 2-3 day part of the following month:
(3,500 x 5%)2 = $350
Reese is fined $350 for failure to file Income Tax return which is worth a new smartphone!
2. Failure to Pay Income Tax Return (FTP)
Failure to pay income tax return is quite more bearable. The fine for late payment costs 10 times less than failure to file. A tax penalty of 0.5% is imposed for failure to pay income tax return per month or part of a month. The penalty starts accruing a day after the deadline.
The penalty increases to a full 1% the day after a notice was sent. “Or 10 days after notice of intent to levy certain assets is issued.”
So if Reese failed to pay her $3,500 tax debt in 15 days after the deadline. She will be charged 0.5% of her tax debt.
3500 x 0.5% = $17.5
A penalty of $17.5 is imposed on Reese for the partial month of late payment, but if she failed to pay 35 days after the deadline, the 0.5% penalty will be counted twice: first for the whole month after the deadline and second for the the partial month that followed.
Note: If perchance you managed to file an extension for the deadline of payment and paid 90% of the taxes during the extension, you will not be charged 0.5% FTP penalty. However, you are still required to pay the remaining amount on or before the extended due date.
3. 2 Hit Combo: Failure to Pay and File Tax Returns
What if you made a 2-hit Combo? That is, you’re wise and diligent enough to fail both in paying and filing your Tax returns?
According to the IRS, when the 5% penalty for FTF and the 0.5% penalty for FTP is applied for any month. The maximum penalty that will be imposed is 5%.
Take again for example:
Reese filed and paid $3,500 worth of tax return 35 days after the due date. Therefore, she will pay $350.00 penalty. In other words, the FTF penalty will be deducted with the amount of FTP penalty. However, the FTF runs concurrently thus:
Tax Debt x FTF penalty: ($3,500 x 5%) x 2 = $350
Tax Debt x FTP penalty: ($3,500 x 0.5%) x 2 = $35
FTF-FTP (+FTP) : $350 – $35 (+$35) = $350 Total of Penalties
A very nauseous notation right? That’s why it is very much important that you pay and file your taxes on time.
Other Offences and Penalties
Penalty for Negligence. Negligence on the part of the taxpayers in reporting income tax is way more costly than FTF and FTP. Negligence of rules or regulation and understatement of tax are the two most common negligence offences. But the IRS has broader statement on this:
“‘Negligence’ includes (but is not limited to) any failure to:
- make a reasonable attempt to comply with the internal revenue laws
- exercise ordinary and reasonable care in preparation of a tax return or
- keep adequate books and records or to substantiate items properly”
The penalty for negligence and understatement of income tax is worth 20% of the understated tax. However, if you erroneously stated your income tax return, in good faith, that is with reasonable cause, you will be exempted from the penalty.
Late Filing of Information Returns
Information returns are tax documents reported to the IRS by some individuals or organization concerning certain business transactions. This is basically information that taxpayers return to the IRS in order to keep them track of the business transactions made during the tax year. The forms included here are Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G.
In July 2015, the IRS increased the penalties for the information returns. Here is a rundown of the penalties–real crippling cost of late filing of information returns; understatement of information; and committing incorrect statement(s):
- A fine of $50 per information , is charged if you file within 30 days of due date with the maximum penalty of $532,000 per year ($186,000 for small businesses);
- While a fine of $100 per information Form is imposed, if you file more than 30 days after the due date until August 1 with maximum penalty of $1,596,500 per year ($532,000 for small businesses);
- And Pay $260 per information , if you file after August 1 with maximum penalty of $3,193,000 per year ($1,064,000 for small businesses).
But failing to file a correction to information return is even more costly as it imposes no maximum penalty. Failing to report a correct statement costs $260 per form without maximum limit for the tax year!
How to Avoid the Preposterous Cost of Late Tax Filing
No one can circumvent tax penalties. It flies like a dragonfly and stings like a bee. The penalties accrue swiftly and the costs so high and crippling. But it is good to know that there are ways on how to avoid filing and paying the taxes late.
1. Filing for Tax extension
There is no better way in avoiding tardiness than extending the deadline. Filing a tax extension can push the due date up to 6 months giving you enough time to complete all the records needed for filing. However, the extension is only applied for Filing tax returns and not for paying the taxes you owe. If perchance, you owe an amount you are expecting, be sure to make a payment before the due date.
Actually, you still have to observe the due date even when filing tax extension. Filing tax extension shall be filed within the deadline in order to dodge the FTF penalty.
How to file for Tax Extension.
You will need to file Form 4860 by paper or electronically to the IRS on or before April 15th– the original deadline–requesting for an extension. The approval of which extends tax filing up until October 15th. If 6-month won’t suffice to file your tax, you can opt to send a letter of request addressed to the IRS for another 2-month extension.
2. Payment Options
When crisis comes and you can’t pay your taxes full on time, you can opt for Installment Agreement. Such a good news for everyone, everyone can apply for installment hassle-free online via the website of the IRS. But the catch, is that you must file all required returns on time. (You can’t avail or both tax extension and payment installment.
Who may qualify?
Individuals owing $50,000 or less of total taxes are qualified. And a short term agreement is available if your balance is under $100,000.
This option deducts tax debt of taxpayers. The process for application is more stringent than the previous one. IRS considers many factors like your assets, incomes, expenses and the ability to pay. The program also requires that the taxpayer is current with all filing and payment requirements. And a taxpayer undergoing a bankruptcy proceeding is not eligible.
At any rate, you can try if you think you can qualify by taking the OIC Pre-Qualifier.
3. Penalty Relief
If you finally fell prey to tax penalties, a relief or exemption are the only two words that sounds music for you. Fortunately enough, there is faith in humanity, and cases for relief and exemption is possible.
A relief from tax penalties is available for taxpayers who, in good faith, complied with all the tax requirements “but were unable to meet tax obligations, due to circumstances beyond control.”
Reasonable Cause. When a taxpayer was unable to file or pay income tax return due to uncontrollable circumstances, the IRS can provide a penalty relief. These reasonable causes are what the French calls, force majeure.
These circumstances include:
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Other reason which establishes that a taxpayer tried his best to comply but his best wasn’t good enough.
Supporting documents are required in order to establish the veracity of reasonable causes: the likes of hospital certificates, court ruling, and other documentation will be required.
This process is yet again, stringent because the IRS will establish a fact-finding investigation in order to ensure that the uncontrollable circumstance indeed happened.
Note: If you are claiming for a refund, you are also free from tax penalties.
Tax in itself is costly. No one takes home a whole pie of his salary income. The government always takes a portion from it. And we have to admit that we need it. We need to pay our taxes. And this is one of the most painful chore we have to regularly make. More so painful when we are inflicted by penalties. But there are prudent and wise steps that anyone can take in order not to forget the tax due dates <hyperlink to infographic>, and to be always prepared to file and pay taxes.
One good practice is to know everything about your taxes. You can follow our blog for tax tips, guidelines and information by clicking here.
Have you had your nightmare experience with tax penalties? Share your experiences by commenting below.