Ominous music begins as April 15th approaches every year. It’s like Jaws; only the predator wears a suit and knows your Social Security Number.
Do you paddle away, trying your hardest to avoid the threat?
If so, chances are you’ll get a nice little shark bite in the end. The audience knows it – that’s why they’re yelling at the screen for you to turn back around and look that beast right in the eye with your Form 1040 in hand.
But alas, not everyone can muster that kind of composure in the face of danger. Perhaps you didn’t file your return. The deadline is behind you. You realize you made a mistake. What happens now? Is your error too late to correct?
The answer to the question of what happens if you file your taxes late depends on whether or not you owe money to the IRS.
If you are owed a refund, the agency won’t charge you a penalty for filing late. They’re happy to hold on to your money interest-free for as long as you’ll let them. You have three years to file a return to get your payday.
But if you owe taxes to the IRS and miss the filing deadline, the agency will charge you failure-to-file and failure-to-pay penalties. This is why you should file on time even if you can’t pay on time. You can work with the IRS to find a payment solution that will work for you.
You’ll be on the hook for penalties if you miss the deadline for filing your return, paying your tax bill, or both.
These penalties continue to accrue month after month until you take action, which means that you’ll pay less in penalties if you file and pay as soon as you can after you’ve missed the deadline.
Failure-to-file penalty: The IRS will start charging you 5% of your unpaid tax bill each month or fraction of a month that the paperwork Is late, plus interest, beginning the day after you miss the deadline.
Failure-to-pay penalty: If you don’t pay your tax bill when it’s due, the IRS will start charging you 0.5% of your unpaid taxes each month or fraction of a month that passes after the deadline, plus interest.
If you owe both of these penalties in any given month, you will pay a maximum of 5% of your tax bill. Each of these penalties can accumulate to account for up to 25% of your unpaid taxes. Note that you'll also be accumulating interest on your unpaid amount as well.
You have 60 days from the due date to file your tax return to avoid even bigger penalties. After 60 days, the failure-to-file penalty jumps up to $205 or 100% of your unpaid taxes, whichever is less. Meanwhile, the failure-to-pay penalty keeps accruing at 0.5% of your unpaid bill.
Another consequence of filing too late could be jeopardizing your receipt of the advance tax credit that helps pay for your health insurance premiums. The government pays the advance tax credit directly to your insurance provider each month to cover a portion of your premium. If you don’t file your taxes, you will lose eligibility for this credit in future years, and you may have to pay back some or all of the credit payments that the government has made on your behalf.
If you have a good reason for your tax return or payment being late — referred to as a “reasonable cause” — then you don’t have to pay the late-filing or late-payment penalties. The IRS is quick to note that “this is usually the exception, not the rule.”
The agency decides whether your cause is reasonable on a case-by-case basis. It must be clear that you applied “all ordinary business care and prudence” to try to meet your tax obligations. Such reasons include the death of an immediate family member, an inability to obtain records from others, and natural disasters.
Not having enough money is not considered a reasonable cause. However, there may be a legitimate reason that you lack funds that would be considered reasonable, in which case you may be excused from the failure-to-pay penalty.
To make a case to the IRS that you have reasonable cause to avoid penalties for lateness, you’ll need to set out the details of your situation in a clear and comprehensive way. Answer the following questions in anticipation of discussing with an IRS agent:
You’ll need proof of your extenuating circumstances to officially establish reasonable cause. This may include things like hospital or court records, documentation of damage from a disaster, or a letter from your doctor attesting to serious illness.
If your taxes are officially late, you’ve crossed the Rubicon into penalty territory. No more Mr. Nice Guy from the IRS: You are frozen out of the small kindness of being able to file an extension to get more time.
The good news is that you can still file and pay your taxes without anyone yelling at you, and if you do it quickly, you’ll pay a minimal penalty. Just the same, it’s a good idea to keep an eye on the calendar and reach out to the IRS if it appears you won’t be able to file on time.
Do not pass Go, do not collect $200, ask for an extension if there’s any chance you might not be able to file on time. This automatically protects you from failure-to-file penalties for six months after the deadline. For example, if you filed your extension before the April 15th income tax deadline, you then have until October 15th to file.
But beware that an extension to file does not give you more time to pay. If you think you’re going to owe money, you need to submit Form 4868 by the deadline, along with the amount you think you owe. If you can’t pay by the deadline, talk to the IRS about a payment plan as soon as possible.
Failure-to-file penalties only apply to those who owe tax bills. If you’ll be receiving a refund from the IRS, you will face no penalty if you don’t file your return by the deadline, even without seeking an extension. Note that this applies to federal taxes only; your state may have different rules.
Of course, the main reason you should file if you’re due a refund is that you won’t get your money until you file your return. Unless you want to let Uncle Sam keep your money interest-free while you sit around empty-handed, get that return in as soon as you can.
As stated earlier, the inability to pay what you owe is not considered a reasonable cause to avoid filing your return. So, unfortunately, you’re still on the hook to file, pay your taxes, and pay penalties now that you’ve overshot the deadline.
You have a number of options when you’re in this situation:
To pay your bill with a credit card, you will go through a third-party facilitator, which will charge a convenience fee for the service. You can avoid the fee if you get cash through a bank loan, home equity loan, or cash advance. Of course, these options likely come with their own fees and interest charges.
To apply for an installment arrangement to pay over time, attach Form 9465 Installment Agreement Request to your tax return. In the fall of 2020, the IRS made it easier to qualify for and pay an installment plan. The new rule eases paperwork requirements and gives taxpayers 180 days instead of the usual 120 days to pay their bills via installments. This option comes with costs as well — you’ll pay a set-up fee of $43-105 and interest charges, plus the failure-to-payment penalty continues to accrue on any unpaid balance each month.
The IRS sometimes will agree to accept less-than-full payment, called an "offer in compromise.” To apply for one, fill out Form 656: Offer in Compromise Package. The IRS is authorized to extend this offer if there are doubts about your tax bill’s accuracy, if it’s unlikely you’ll ever be able to actually pay the bill, or if making you pay would result in some unusual or unfair circumstance.
You can file for an extension for payment of up to six months using Form 1127: Application for Extension of Time for Payment of Tax. However, you’re unlikely to be granted this leniency. For one thing, you have to apply before your tax is due, so you have to be organized and have foresight.
You also have to provide a complete statement of all your assets and liabilities as of the end of the prior month, as well as an itemized list of money you received and spent in the last three months. You also have to prove that it would be an undue hardship to have to pay the tax when it’s due.
To conclude, the answer to the question “What happens if I file after the deadline?” is “nothing good!” But that doesn’t mean that once the witching hour has passed, you should pretend you’ve never heard the word “taxes” before.
Face the music, do what you need to do to get that paperwork filed, and that bill paid, and then… get ready to do it all again next year.
If you’re ready to get your taxes sorted out and need some help, Taxfyle can help. Our Pros can help you track down your tax documents, file back tax returns, request penalty waivers, and set up installment plans. Just sign in or sign up to get started.
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