April 15th is quickly coming up. This can be a stressful time of year – preparing your taxes is simply not a lot of fun. However, it is important to file your return on time.
Why is important to file and pay on time?
First, not filing or paying can be a crime. The willful failure to file a tax return or pay tax is a misdemeanor under IRC § 7203.
The IRS will almost certainly hit you with big civil penalties.
You could end up with penalties that add up to about 50% or more of the original tax plus interest. Here is a summary of the penalties:
Failure to pay. Separate penalties apply for failing to pay and failing to file. The failure to pay penalty is the “gentler” of the two, running at 1/2% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 20, the penalty is 1% (1/2% times 2 months (or partial months)). The maximum penalty is 25%. The failure to pay penalty is based on the amount shown as due on the return (less credits for amounts already paid, e.g., via withholding or estimated payments), even if the actual tax bill turns out to be higher.
Failure to file. The failure to file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension for your filing due date, you are not filing late unless you miss the extended due date. However, a filing extension does not apply to your responsibility for payment. Lesson – if nothing else make sure you file your extension by April 15th – use Form 4868.
If the 1/2% failure to pay penalty and the failure to file penalty both apply, the failure to file penalty drops to 4.5% per month (or part) so the total combined penalty remains at 5%. The maximum combined penalty for the first five months is 25%. Thereafter the failure to pay penalty can continue at 1/2% per month.
What can you do if you get hit with these penalties?
These penalties are actually pretty hard to get abated for a perpetual offender.
Reasonable cause. Both penalties may be excused by IRS if your lateness is due to “reasonable cause.” Typical qualifying excuses include death or serious illness in the immediate family, postal irregularities, or bad advice (e.g., you needn’t file), given to you by your tax advisor or IRS itself.
Administrative Waiver. Penalty relief can also be obtained for those who make a one time mistake and otherwise have a good compliance history of filing and paying their tax.