By: Jeff Skolnick, CPA, M.S. Taxation
As most people know the filing deadline for income tax returns is April 15th however not everyone always files by the deadline. This article will focus on what happens when a taxpayer does not file on time or if the taxpayer filed but did not pay their liability in full. I will focus on federal returns in the article, although many of the same principles apply to state income tax liabilities as well.
Tax return was not filed on time, what’s next?
There are some taxpayers that do not file their returns on time but have a valid extension. These taxpayers have no problem at all. The IRS recognizes that it is not always possible to gather all of your information and file by April 15th. Typically, taxpayers that are involved in partnerships, LLCs, S corporations, Estates or Trusts may need additional time to obtain information pertinent to file their income tax returns. Filing an extension, however, does not extend your time to pay therefore if you are unable to file by April 15th you are still required to estimate the amount of tax you owe and pay it by April 15th. The main reasoning behind making people estimate their balance due is that if this was not done then any taxpayer with a balance due would automatically go on extension and wait until October 15th (the due date of extended returns) to pay their balance due.
Some taxpayers that do not file on time also do not file an extension form. This is a little more complicated. There are late filing penalties of 5% of the amount due each month or part of a month that your return is late. The maximum penalty is 25%.
Individuals without a valid extension should file as soon as possible to at least stop the late filing penalties and pay as much as possible to reduce or eliminate the late payment penalties (which are explained below).
What happens if I did not pay may tax in full by April 15th?
The IRS imposes a late payment penalty of ½ of 1% of any tax not paid by April 15th. It is charged monthly and the maximum penalty is 25%.
What if I can’t pay my entire balance due?
For those taxpayers that cannot afford to pay their balance in full I would advise paying in as much as possible. Penalties and interest are charged on outstanding balances and therefore the more that you can reduce the outstanding balance, the more you can reduce your penalties and interest.
The IRS does have a number of different options available to those without the means to pay their bills all at once:
Once again, I want to mention even if you do not have the money to pay your balance due file your return as this will eliminate any late filing penalties. You will still be subject to late payment penalties.
Full payment Agreements – The IRS will give you up to 120 days to pay your balance in full. There is no fee to set this up, however, you will be subject to penalty and interest until you are paid in full. This may be setup through the IRS Online Payment Agreement (OPA) application found at www.irs.gov or by calling the IRS at 800.829.1040.
Installment Agreements – If you cannot fully pay your liability within 120 you have the option of signing up for an installment agreement. There is a fee for this service unless you are considered to be a low income taxpayer. Taxpayers may either signup online at www.irs.gov, filing Form 9465 or by calling the IRS at 800.829.1040. The IRS offers a number of different payment options:
- Direct debit form your bank account
- Payroll deduction from your employer
- Payments by Electronic Federal Tax Payment System (EFTPS)
- Payment by credit card
- Payment by check or money order or
- Payment with cash at certain retail locations
I must admit I have never had a client pay cash at a retail location but since the IRS lists it as an option, I wanted to mention it.
In order to sign up for an installment agreement you will be required to choose a monthly payment and a monthly payment due date. I always advise taxpayers to pick a number they can absolutely pay every month and a date they can pay by. You do not want to set up a payment and then miss a payment. You can always pay the balance off early if you are in a position to do so.
Offer in Compromise – This option, while available, is much more complicated for taxpayers to qualify for. An offer in compromise will actually reduce your tax bill based on your ability to pay. First of all, taxpayers must be up to date with all filings, including estimated tax payments for the current year. This requirement alone often knocks taxpayers out of the box as many do not have the money to gave paid current estimated tax payments. The IRS will then look at all of the taxpayer’s assets, liabilities, income and expenses to determine eligibility. Again, this is a very complicated process generally to be used by taxpayers with substantial balances due and virtually no way to pay it.
Conclusion
This article focuses on taxpayers that either file or pay their taxes late. Although the article explains the general rules you would be well advised to speak to a tax professional as there are sometimes circumstances which may make a taxpayer’s situation unique.