Thousands of American taxpayers leave unclaimed refunds in the hands of the IRS – in all, totaling more than 1.5 billion dollars every single year.
If you're reading this and the year is still 2023, the April 18 deadline for filing taxes in the United States has already passed. For those who have yet to file, the time to act to avoid mounting costs is now.
People miss the tax filing deadline for various reasons, ranging from life events to a lack of financial records to procrastination. With quick action, limiting your exposure to fines and interest is possible — and filing now can ensure receipt of any tax refunds you may be due.
How to Handle a Missed Tax Deadline
The first thing to do is file as soon as possible. Doing so will staunch the bleeding from the filing penalties. For those who will receive a refund, which is around 80% of people, filing late will not get you penalized.
“If you have a refund due, then you are not behind on any tax payments,” says Patrick McCormick, a Pennsylvania-based attorney. “That means that you will not face penalties or interest on the late taxes because there are no late taxes. In this case, the only thing that is late is your return, which you can correct immediately.”
Even after the April 18 deadline, it's still possible to file for free under the Free File Program offered by the IRS until mid-October. The program covers anyone with an adjusted gross income below $73,000. It guides the user through a list of easy questions and interfaces with popular software like TaxAct or TaxSlayer.
While the Free File Program is also available for people earning more than $73,000, the calculation features may be trickier. Note that additional fees may apply for state tax filings.
Qualifying Late for an Extension or Penalty Relief
Most people who have yet to file for an extension in 2023 are out of luck, as the tax filing deadline has passed. However, certain groups automatically qualify for more time to file and pay – and these people receive no penalties or interest charges during their extension periods. They include the following categories:
- Military personnel working in a combat zone (in addition to support personnel) qualify for a minimum of 180 extra days.
- U.S. citizens and resident aliens living and working outside U.S. territory may be eligible for a two-month extension.
- Disaster victims may qualify for additional time to get their tax filings in order.
“Taxpayers can request that penalties be abated for reasonable cause, such as illness or a natural disaster,” adds New York-based tax attorney Yvonne R. Cort.
“If the taxpayer has a good history of filing and paying on time for the previous three years,” she points out, “the IRS may waive penalties upon request under its First Time Abate Program. Interest will accrue until payment is made in full.”
It's important to remember that a tax filing extension does not give you longer to pay but only longer to file, generally six months. The key is to pay sooner rather than later so as to reduce or eliminate interest penalties.
Potential Consequences of Missing the Tax Filing Deadline
The good news is that the costs associated with paying your taxes late eventually cap out at a certain level; the bad news is that this level is relatively high. It's also worth mentioning that criminal penalties only enter the equation when there is deliberate tax evasion.
In some extreme cases, after a series of notices, the IRS may issue a tax lien, alerting other creditors of the government's claim on your debt. The lien precedes the tax levy, which is when the garnishing of wages and seizing of assets begins.
However, in most cases, it's very unlikely to get to that point. The two main penalties you will typically encounter in a late tax situation are the failure-to-file penalty and the failure-to-pay penalty. Both kick in immediately after the filing deadline passes.
Failure to File
“This fine is equal to 5% of the unpaid taxes, rising by 5% each month to a maximum of 25%,” explained Sara Sharp, founder of Acta Tax Consulting. “In other words, after five months of delay, the penalty is at its highest level. The minimum fine is $435 if your tax return was more than 60 days overdue.”
Failure to Pay
“For every month the tax is not paid, you will be assessed a fee equal to 0.5% of your tax balance,” Sharp continued. “This penalty will rise by 1% every month if you don't pay your tax within 10 days of receiving an IRS letter. The penalty cannot be more than 25% of your unpaid taxes.”
In addition to the fines mentioned above, late taxpayers can be on the hook for interest penalties on their unpaid tax bills.
“Interest is based on rates set by the IRS and compounds on a daily basis,” explains Eliot Bassin, a CPA from Connecticut. “When you factor in interest and penalties which could be owed at the state level, these amounts add up quickly.”
“If they cannot afford to pay the amount that's owed, then they should consider other options, such as setting up an installment agreement,” he adds. “Installment agreements allow amounts that are owed to be paid over time and generally provide for a reduced rate of interest and penalties. This can really help someone that can't pay everything they owe right now.”
How to Plan More Effectively and Avoid Tax Problems
Prevention is always the best cure when it comes to financial trouble. Getting far ahead in your tax planning is a simple way to stay on the right side of the tax authorities.
“Set reminders for yourself so that you're aware of important dates such as tax deadlines,” says Bassin. “I recommend setting up multiple reminders, for example, six weeks out, four weeks out, etc.
“For clients who tend to owe money, we recommend setting up a dedicated tax savings account. Transfer money into the account on a regular basis,” he added. “This prevents the need to move large sums of money near the filing deadline.”
It also pays to get professional help: “Especially if you pay quarterly taxes as an independent contractor,” explains McCormick, “keeping in touch with your tax preparer and tracking those quarterly deadlines is vital.”
Cort shares another strategy – centralize the relevant materials: “Keep a file, physical or digital, where you can put charity receipts and other tax documents throughout the year.”
This article was produced and syndicated by Wealth of Geeks.