That date circled in red ink on your calendar has finally arrived: July 15th, Tax Day. But rather than looking forward to checking taxes off your to-do list, (or even better, a deposit to your bank account from the IRS), you’ve dreaded this day because you failed to file your return on time. So what happens now? Well, the short answer is that there may be monetary penalties for failing to file your tax return or for failing to pay taxes owed by the deadline (which has been extended this year due to Covid 19). These penalties can be a little overwhelming, so let us break the 4 ways down for you.
1| You’ll End Up Owing Interest on Your Tax Liability
The most common penalty you may face for failing to file your tax return on time or to pay taxes you owe is interest rates. These rates will vary depending on just how late you are. Fees and interest begin to accrue the day after your taxes are due and will continue to grow until the balance has been paid off. The failure-to-pay penalty is 0.5% of the balance per month and the maximum you can be charged is 25% of the total balance; although these numbers may not seem like a lot, it can really add up over time. Additionally, interest is also charged on the outstanding balance. This rate is based on the federal short term rate plus three percentage points. In short, not paying on time, or worse, not paying at all, can end up costing you a lot more than you originally would have paid.
2| Money Could be Pulled from Your Check or Bank Account
Besides interest rates, another way in which the IRS collects its money is through tax levies. A tax levy essentially means that the IRS can take the money you owe them through sources such as your wages or bank account. The IRS may garnish your wages; in other words, a portion of your debt is taken out of your paycheck, or they may even take the money straight out of your bank account. To sum it up, not paying your taxes and hoping the problem will go away is simply not an option.
3| A Lien Could be Placed on Your Property
The real trouble starts when you owe the IRS $10,000 or more. In this case, the government may put a lien on your property which can negatively affect your credit score since liens appear as unpaid debts on your credit report. The worst case scenario may even justify jail time.
4| The IRS Could Ultimately File Your Taxes for You
So you’ve decided to dig your feet in the sand and still not pay up? Well, the IRS may do you a favor and file for you. While this may sound like a good thing, trust us when we say that you do not want the government filing taxes for you. The IRS receives copies of any income related documents such as W-2s and 1099s, so they know how much you made last year. What they don’t take into account however, are any deductions or credits you may be able to take advantage of. Therefore, when the IRS files for you, you’re paying the maximum amount you may owe.
Okay, so hopefully we’ve scared you just enough to encourage you to file your taxes on time. However, some people miss the filing deadline for reasons other than forgetting and procrastination. The two other reasons we hear from our clients is that they genuinely need more time to pull their return together or because they owe money they can’t afford to pay in one lump sum. If this sounds like you – you have options.
The IRS Offers Payment Plans
The good news is that the IRS will work with you. If you’re not able to pay your taxes on time, be sure to set up an installment agreement with the IRS. This lowers that monthly interest rate on the outstanding balance to 0.25%. With a payment plan, you could end up paying as little as $25 per month or secure a term as long as 60 months to pay back your debt.
You Can File an Extension but Be Aware of the Fine Print
If you know you’re going to miss the deadline, give the IRS a heads up by filing an extension. But, unfortunately that doesn’t mean that your payment due date is extended as well. If your extension was approved, but you suspect you may owe taxes, then you must fill out a Form 4868 and pay the estimated amount due. Keep in mind that if you pay at least 90% of the taxes you owe, then the failure-to-pay penalty may be waived as long as you pay off your balance by the extended due date.
So What Are the Next Steps?
Let’s say it’s nearing July 15th and you haven’t filed your taxes or aren’t able to pay what you expect to owe. What can you do now? Regardless of your financial situation, you should always file your return on time. Filing late means you’ll be required to pay the failure-to-file penalty and interest on any balance as previously mentioned and it’s best to do all you can to avoid these extra costs. Of course if a very special situation such as a severe natural disaster applies to you and you’re able to show proof, you may not have to pay these penalties. The best course of action is to file your return on time and work out a payment plan with the IRS to avoid interest and penalties.
Need assistance with any tax related issues? We’re happy to help you navigate the process. Call us today at (603) 601-4515 or email info@MarcMichaudAssociates.com.
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