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Filing Your Taxes Late? Find Out if You'll be Penalized
Under normal circumstances, the federal tax deadline is April 15, 2021. If Tax Day happens to fall on a weekend, you can file up until the following Monday.
However, the circumstances surrounding the 2021 tax season have been anything but normal.
New tax guidelines passed through the American Rescue Plan Act of 2021, the IRS, and the U.S. Department of the Treasury have extended this year’s tax filing deadline. But what does that mean for you? The answer will depend on where you live and whether or not you owe money.
What is the 2021 filing deadline for tax year 2020?
Individuals can defer tax payments and filing tax returns for the 2020 tax year without incurring penalties or interest until May 17, 2021. Interest and penalties will instead start to accrue on May 18, 2021. It’s unnecessary to file any additional tax forms to access this new deadline.
It’s important to note: This extension only applies to federal income tax. Filing and payment deadlines for states could differ. Thirty-five states are following the federal government’s lead and extending state tax deadlines to May 17, too.
Additionally, even though the federal government has given us this extension, it’s still important to note your tax due dates and file accordingly.
Why it’s important to file on time
There aren’t any federal penalties for filing a late tax return if you don’t owe any money to the government and know you’ll be receiving a tax refund; however, there may be other consequences for not filing on time that are bad for your bank account and financial well-being.
Filing your taxes later does mean your refund — if one is owed to you — will be in your hands later. You have three years to claim your refund from the time the taxes are due. The same rule applies to claiming tax credits, such as the Earned Income Credit, which is a benefit for households earning low to moderate income, and the 2020 Recovery Rebate Credit if you didn’t receive the first and second stimulus checks.
The information from your federal tax return is used by financial institutions when you apply for Federal Student Aid, a business loan, or a home loan.
“It’s just a good idea to file taxes every year and on time so you’re ready for anything in life,” says Alison Flores, principal tax research analyst at H&R Block’s Tax Institute.
Not filing on time can also impact you if you’re self-employed.
“Any self-employed income you earned will not be reported to the Social Security Administration and you will not receive credits toward Social Security retirement or disability benefits,” says Dan Rahill, CPA, JD, managing director and senior vice president of Wintrust Wealth Services.
There is also the flip side to this coin: If you haven’t paid enough in taxes during the year and you have a tax liability — meaning you owe money to the government — filing late can result in some pretty harsh fees.
What if you file late and owe Uncle Sam?
If you overslept on the tax-filing deadline day, it’s best to file as soon as possible to avoid raking up additional fees and increasing the amount due. It’s possible to incur two penalties: one for filing late and one for paying late. Both of these penalties can accrue interest.
Taxpayers that don’t file on time will probably owe interest and penalties.
Typically, the IRS will charge interest on an unpaid balance, which can include tax, penalties, and compounded interest. This interest accrues daily and typically starts on April 15 if your return shows you owe tax — 2021 will be an exception to the typical deadline date.
Depending on how much you owe, a failure-to-file penalty may be 5% of that amount for each month that your tax return is late, up to a maximum penalty of 25% of the unpaid taxes. It’s also important to note that partial months are treated as full months and you can’t pay interest or fees on part of a month — you’ll still get hit with the full 5%, even if you are just a few days past the start of a new month. If the amount you owe is on the smaller side, but you file income tax returns more than 60 days after the due date, the minimum penalty will be either $435 or 100% of your unpaid taxes, and you’ll pay the lesser amount.
If you know you’re going to be late -- even by just a couple of days -- the best thing you can do is file an extension to prevent penalties. Use the IRS Free File to request an automatic tax-filing extension with Form 4868.
Normally, the IRS could fine you with a failure-to-pay penalty if you don’t pay your taxes by the annual due date. Filing an extension doesn’t extend the time to pay by the original due date — it only extends the time you have to file.
The failure-to-pay penalty is .5% per month and can add up to a maximum of 25% of the unpaid tax.
“The failure-to-pay and the failure-to-file penalties can overlap,” says Stephanie Otake, CPA, tax associate at Drucker & Scaccetti PC. “For any month in which both penalties apply, the late payment penalty is waived.”
I can’t pay my taxes, should I still file?
If you can’t pay the entire account balance that you owe, the IRS recommends you pay what you can now, so you don’t continue to accrue unnecessary interest. They also suggest taking out a loan or paying by debit or credit card, as it could be less costly than owing the IRS money. However, before moving forward with either of these payment options, you will want to make sure this is the most cost-effective option for you.
Here are two articles to guide you in either of these situations:
The IRS offers three options for filers who can’t pay their taxes when they are due:
Option No. 1: Payment plan
This option allows you to come to a payment agreement with the IRS to pay your balance in full, or to participate in either a short-term plan (paying in 120 days or less) or a long-term plan (an installment agreement with the IRS for more than 120 days). Taxpayers will file a Form 9465 to request a monthly installment plan if they can’t pay the full amount shown on the tax return.
Option No. 2: Offer-in-compromise
The IRS considers a filer’s ability to pay, income, expenses, and asset equity to determine if they can pursue this option and settle the debt for less.
Option No. 3: Temporary delay in the collection process
Based on your financial situation, the IRS can determine that you can’t afford to pay the current debt and delay collection on your tax debt. If you pursue this option, penalties and interests will be added on to your outstanding debt.
I have an excuse, is it okay if I file late?
If you need to file late, the IRS will take into consideration some reasonable causes to alleviate penalties. A sound reason deemed by the IRS can include fire, casualty, natural disaster, burglary, inability to obtain records, death, and serious illness.
Because of the unprecedented winter storms in February, residents in Texas, Oklahoma, and Louisiana have until June 15, 2021, to file their federal 2020 tax return.
If you’re on active duty in the military and have been deployed in a combat zone, the IRS understands you might not have access to your records and tax software — therefore, this could also be an acceptable excuse to file late.
If the IRS deems your excuse as valid, it is possible to be relieved from penalties for failing to:
- File a tax return
- Pay on time
- Deposit certain taxes.
A lack of funds is not considered a good reason to skip out on making your tax payments. Neither is forgetting to file or lacking knowledge on the process. Missing tax documents is also not an acceptable excuse for filing late.
“You should file an extension and pay any taxes you may owe based on the information you have at the time, plus an estimate for the missing information,” Otake says. “Once your return is extended, you will have more time to gather the missing information and file your return by the extended due date.”
Consider filing a tax extension even if you can’t pay your federal tax bill
The failure-to-file penalty is much higher than the failure-to-pay penalty.
“If you’re going to be late, always file an extension,” Flores says.
If you owe the IRS $2,000 and fail to file your return by Tax Day, here are two possible examples of what could happen:
Example No. 1
If you filed an extension on or before May 17, and pay your bill 10 days later on May 27, your penalty would be $12. The .5% late-payment penalty would be applied to the $2,000 you owe plus approximately another $2 with the 2021 IRS 3% interest rate.
Example No. 2
If you filed your return and paid your tax bill a couple of days later on May 25 without filing an extension, you would pay a $100 penalty. The 5% late-filing penalty would be applied to the $2,000 and you would owe another $2 of interest with the 2021 IRS 3% interest rate.
It’s apparent that the late-filing penalty is heftier than the late-payment penalty.
Alison Flores, JD, is a principal tax research analyst at The Tax Institute at H&R Block. Alison specializes in the Tax Cuts and Jobs Act (TCJA) and individual income tax issues.
Daniel F. Rahill is a managing director and senior vice president at Wintrust Wealth Services, where he works with clients to develop strategies for their tax, estate, investment, philanthropic, and family capital needs. He is often published and quoted in publications, including Chicago Tribune, Crain’s Chicago Business, ABC7, Yahoo Finance, and the Illinois CPA Society’s Insight Magazine. Dan is a former chairman of the Illinois CPA Society and serves on three academic advisory boards.
Stephanie Otake graduated from Villanova University in 2013 prior to joining in the tax field, where she has spent three years working on tax compliance in the financial services sector and three years working on individual, business, and fiduciary tax compliance. She is currently pursuing a master’s in taxation at Villanova University. Otake is a tax associate at Drucker & Scaccetti in Philadelphia and is an active member of the Pennsylvania Institute of Certified Public Accountants.