The annual tradition of rushing to prepare and file your tax return in April is a reality for most of us. This year the deadline was extended to September 15th because of the pandemic. If you missed the extended deadline as well, you might be wondering what to expect when one does not file a tax return. While the short answer is that nothing happens immediately, you may be concerned about the consequences. If you have unfiled tax returns, be sure to get in touch with a tax preparation firm to help you get back on track with minimal impact.
Owing Money or Getting a Refund
The IRS is pretty serious about penalizing people who owe money, but it’s a different story if the IRS owes you. While you could end up forfeiting your refund if you don’t file for more than three years, you won’t likely lose anything if you simply file late. To avoid any complications and to ensure that you qualify for all credits and deductions that you are entitled to, get your filing up to date as quickly as you can, so you can enjoy your refund.
Penalties for Not Filing vs. Not Paying
Not paying your taxes is different than not filing your tax return, and the penalties are different too. If you know that you need to pay taxes because your employer doesn’t withhold enough, you made money from a side-hustle, or you are self-employed, then you can pay that amount before the deadline – even if you don’t file your tax return on time. Doing so may save you a little bit in interest penalties later on.
The penalties for not paying are substantially less than the penalties for not filing your tax return at all. Failing to file on time will result in the IRS assessing penalties of 5% of the amount owing, each month, up to 25%. On top of that, if you don’t file within 60 days of the deadline, another penalty of $210 or 100% of your unpaid tax is levied.
The penalties are calculated differently if you file the tax return but don’t remit the amount owing. In that case, the penalty is calculated 0.5% of your total tax bill for each month past the deadline, up to 25%. On top of that, there is an interest charge, compounded daily, at the government’s short term interest rate plus a premium.
For Example
To compare these two scenarios, let’s say you owed $1000 in unpaid taxes. Three months after the deadline, the penalty for not filing would be 15%, or $150 plus the late filing fee of $210 for a total of $360. However, if you filed the return on time but haven’t made the payment three months later, the penalty would be 1.5% or $15 plus the accrued interest.
2020 has been a tumultuous year for everyone, and being unable to pay taxes was a reality for many. However, if you still haven’t filed your tax return for 2019, or previous years, don’t panic. Seek the advice of a tax professional who can help you put together a plan to catch up. Dealing with unfiled tax returns now will ease your mind about the consequences and may prevent the IRS from taking further action in the future.
