Why your tax return absolutely must be on time -- even if you can't pay on time

Christy Bieber, The Motley Fool

Published 8:04 a.m. ET April 15, 2018 on USAToday.com

If you owe money to the IRS that you can't pay, you're probably pretty nervous with the tax deadline approaching. While you may be tempted to skip filing your taxes and hope the IRS doesn't notice you owe money, that's a really bad idea. Not only will the IRS likely fine you, but you'll face much harsher penalties for not filing your tax returns than you'd face for not paying the amount you owe.

When do you owe a penalty to the IRS?

If you don't file your taxes when the IRS owes you money, you won't be penalized financially. However, you need to file to obtain any refund. You have until 2021 to file your return and still claim a refund on your 2017 taxes.

If you owe money to the IRS, you need to file your tax returns and pay what you owe by April 17, 2018 for the 2017 tax year. If you can't file by the deadline, you can request an extension until October 15, 2018.

The failure-to-file penalty is much higher

If you don't file your taxes when you owe money, you could be hit with not one, but two penalties imposed by the IRS: failure to file and failure to pay. 

  • The failure-to-file penalty is equal to 5% of the taxes you owe for each part of a month you're late, up to a maximum of 25% of unpaid taxes. This means if you're two days late with filing and you owe $1,000 in taxes, you could be hit with a $50 penalty. If you're more than 60 days late, the minimum penalty is the lesser of $205 or 100% of the unpaid tax.
  • The failure-to-pay penalty is .5% of unpaid taxes for each part of a month you're late, up to 25% of unpaid taxes due. This is the penalty you're charged if you file on time but don't pay what you owe. However, if you request an extension to file and pay at least 90% of taxes owed, you may not be charged any failure-to-pay penalties as long as you pay the remaining 10% by the extended due date.
  • The combined penalty for failure to pay and failure to file is 5% of unpaid taxes for any month in which you owe both penalties.

A quick glance at these penalties shows why it's so important that you file your taxes on time, even if you can't pay on time. In most cases, the failure-to-file penalty is 10 times greater than the failure-to-pay penalty.

Keeping penalties to a minimum

Filing your taxes on time, even if you can't pay what you owe, is just one of several steps you can take to try to keep your IRS penalties to a minimum. You may wish to consider whether you could potentially take a personal loan to pay what you owe, depending upon whether the loan rate is lower than the penalties and interest the IRS will charge you. You could also explore IRS payment plans that can reduce the penalties you're subjected to.

Finally, to make sure you don't face the same problem next year, make a plan to save for taxes throughout the year or adjust your withholdings so enough money is taken out of your paycheck to pay the IRS what you owe.

 


What You Should Know if You Need More Time to File Your Taxes

The April 15 tax deadline is approaching. What happens if you can’t get your taxes done by the due date? If you need more time, you can get an automatic six-month extension from the IRS. You don’t have to explain why you’re asking for more time. Here are five important things to know about filing an extension:

1. File on time even if you can’t pay.  If you complete your tax return but can’t pay the taxes you owe, do not request an extension. Instead, file your return on time and pay as much as you can. That way you will avoid the late filing penalty, which is higher than the penalty for not paying all of the taxes you owe on time. Plus, you do have payment options. Apply for a payment plan using the Online Payment Agreement tool on IRS.gov. You can also file Form 9465, Installment Agreement Request, with your tax return. If you are unable to make payments because of a financial hardship, the IRS will work with you.

2. Extra time to file is not extra time to pay.  An extension to file will give you six more months to file your taxes, until Oct. 15. It does not give you extra time to pay your taxes. You still must estimate and pay what you owe by April 15. You will be charged interest on any amount not paid by the deadline. You may also owe a penalty for not paying on time.

3. Use IRS Free File to request an extension.  You can use IRS Free File to e-file your extension request. Free File is only available through the IRS.gov website. You must e-file the request by midnight on April 15. If you e-file your extension request, the IRS will acknowledge receipt. You also can return to Free File any time by Oct. 15 to prepare and e-file your tax return for free.

4. Use Form 4868.  You can also request an extension by mailing a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must submit this form to the IRS by April 15. Form 4868 is available on IRS.gov.

You don’t need to submit a paper Form 4868 if you make a payment using an IRS electronic payment option. The IRS will automatically process your extension when you pay electronically. You can pay online or by phone.

5. Electronic funds withdrawal.  If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from your checking or savings account. To do this you will need your bank routing and account numbers.

Visit IRS.gov for more information about filing an extension and the many options you have to pay your taxes.

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Six Tips for People Who Owe Taxes

While most people get a refund from the IRS when they file their taxes, some do not. If you owe federal taxes, the IRS has several ways for you to pay. Here are six tips for people who owe taxes:

1. Pay your tax bill.  If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe. 

2. Use IRS Direct Pay.  The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.

3. Get a short-term extension to pay.  You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.

4. Apply for a monthly payment plan.  If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit IRS.gov.

5. Consider an Offer in Compromise.  An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.

6. Change your withholding or estimated tax.  You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator on IRS.gov can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.

To find out more see Publication 594, The IRS Collection Process.


IRS Payment Plan

This is the IRS site if you need to go on a payment plan.  It is far better to file your taxes and go on such a plan as the interest rate is quite reasonable and there will be no further failure to file penalties.   The penalties and interest rate are much higher when you don't file.  In short, the IRS does not like to be ignored.

And, for the record, extensions do not give you extra time to pay.  They merely allow you extra time gather your documents and file your taxes.  You are supposed to either pay at the time of extension or have made estimated payments. 

If you are getting a refund, there is no penatly for not filing on time.  However, returns can only be efiled until 15/Oct.  If a return can't be efiled, it will have to mailed in which delays the process greatly.