The Internal Revenue Code requires individual taxpayers file on April 15th of each year to file an extension Form 4868, which allows you to estimate your tax liability for the prior year and make a payment. If you do not file an extension and allow your return to become delinquent, you have created a costly problem for yourself. The act of not filing a return and not paying the tax will cause the IRS to include in your tax debt the penalties of Failure to File and Failure to Pay. Each penalty cannot exceed 25% of the unpaid tax due, which causes huge amounts to be added to your tax liability and upon which interest is paid.
In recent years, we have encountered taxpayers that have not filed in many years – five to eight years. The penalty and interest provisions of the Internal Revenue Code had massive effects on the taxpayer. These people had either bad tax advice, were stubborn, or just wanted to challenge the “800-pound IRS gorilla.” Everyone can guess who won. To avoid this costly mistake, all the taxpayer had to do is to file an “incomplete return with the base information available” and follow up with an amended return within 60 days and the penalty would be minimal.
The IRS offers Tax Tips – In 2013 they issued the following eight important points, which we modified for 2018 rules about penalties for filing or paying late.
- Under IRC Sec. 6651(a)(1) a failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty under Section 6651(a)(2) may apply if you did not pay all of the taxes you owe by the tax filing deadline.
- The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. Also, you can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement with the IRS to make payments. The IRS will work with you.
- The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
- Section 6651(a)(2) applies if you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date and not to exceed 25% of the tax due until it is paid in full. Taxpayers generally can also avoid the underpayment penalty if they owe less than $1,000 in additional tax after subtracting their withholding and refundable credits.
- If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe (85% for 2018) with your extension request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date. IRS announced that it will waive underpayment penalty for any taxpayer who paid at least 85 percent of their total 2018 tax liability through withholding or estimated taxes. The federal underpayment rate is determined quarterly. For 2018 the rate is 4% per annum.
- If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.
- If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
- You will not have to pay a late-filing or late-payment penalty if you can show “reasonable cause” for not filing or paying on time. The IRS takes Reasonable Cause for Penalty Abatement requests on a case by case basis. To qualify for reasonable cause, you basically have to convince the IRS that you had a legitimate reason for not paying or to file on time. You also have to prove that you were exercising ordinary care and prudence. Some reasonable causes are fire, casualty, natural disaster, or other disturbance, but not due to deliberate acts of non-compliance.
Most taxpayers are busy with life and not concerned about keeping records and preparing tax returns until income tax season. They then get busy accumulating their Forms W-2, 1099s, and K-1 so they can have their returns prepared. With the new tax law, most people will find it easier to file their returns. Some will be shocked at not being able to “file the long form” or itemized deductions, but the new tax law is beneficial to the average taxpayer. Still, keep good records especially if you are in a small business. With good records to start, combined with the expertise of a reputable return preparer, CPA, Enrolled Agent, or Attorney, a taxpayer’s life as an individual taxpayer or business person will be easier when dealing with the IRS.
If you or your client want to avoid the potential perils of filing late or filing without payment consider hiring a licensed private investigator / forensic accountant by contacting Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3189, or email firstname.lastname@example.org. Let our 26 years as an IRS Special Agent and 17 years as a private investigator and forensic accountant benefit you and your clients. Click to read about our team and their CVs.