Examples of really bad ideas: Forgetting your spouse’s birthday or your anniversary, do-it-yourself brain surgery, and forgetting to file your federal tax return or pay your federal taxes. You may be short on the cash to pay your taxes, but there are better ways to address your tax problem than avoiding it entirely.
The IRS considers failure to file a more serious situation than failure to pay, and the penalties are appropriately greater. Failure-to-file penalties typically accrue at the rate of 5% (4.5% late filing and 0.5% late payment) of your unpaid taxes each month (or partial month) that the return is late, up to 25% of the total taxes owed. If the tax filing is overdue by more than sixty days, you will incur a minimum penalty of $205 or 100% of your unpaid tax.
That is just the penalty payment – you still have to deal with accrued interest on the unpaid taxes from the due date until the date of payment (at the federal short-term rate plus 3%, which amounted to 4% for the first quarter of 2018 and 5% for the second quarter, beginning April 1st).
You may be able to get an extension on filing your taxes for up to six months under certain circumstances, such as death or illness of family members, natural disasters, incomplete tax documentation, living abroad in some situations, or being deployed in a combat zone. You may also qualify based on technical problems – for example, if you are paying electronically and the routing number supplied by your bank is incorrect.
To apply for an extension in almost all cases, you must file IRS Form 4868 prior to the April 17th filing date. However, even if you get an extension to file your tax return, you are still responsible for paying your taxes on the original due date. "Filing for an extension doesn't get you an extension to pay," says Betterment Head of Tax Eric Bronnenkant. "Let's say you don't pay by April 17th, well then you're still going to have to pay interest on that money later anyway. Filing for an extension is typically a good idea if, let's say, you haven't gotten all your tax documents, you've been working overseas and you didn't get all the information you needed from your employer, or you've got a complex tax return and you're investing in complex investments. Those are good reasons to request an extension. Requesting an extension doesn't solve any problems, if your only problem is that you expect to owe money."
To allow for some payment latitude for estimates, the IRS waives the failure-to-pay penalty if you pay at least 90% of your taxes before the original due date and you pay the rest by the end of the extension. If you file electronically and use the IRS electronic payments options, you will not need to submit a paper copy of Form 4868 – the extension will be automatically processed.
Should you incur a failure-to-pay penalty, the charge is 0.5% per month or partial month that the charge is outstanding and is limited to 25% of the total taxes owed. Of course, interest continues to accrue indefinitely until the bill is paid.
The IRS is not interested in punishing those who fail to pay – they would much rather have the money. As a result, you may be able to work out installment plans or other payment schedules that reduce your penalties.
In a small gesture of goodwill, when the failure-to-file and the failure-to-pay penalty both apply to the same month, the failure-to-file penalty is lowered by the amount of the failure-to-pay penalty. However, the minimum penalties still apply in that case.
Make sure that you file your federal taxes on time. If there is a legitimate reason that you cannot, get an approved extension as soon as possible, make the necessary payment of estimated taxes, then work out payment terms with the IRS to minimize any damage.
Not being up-to-date with the 2017 Tax Cuts and Jobs Act and the 2018 Bipartisan Budget Act is no excuse for filing your taxes late. Check through our list of tax articles for any changes that may affect you and if you need more time, file for an extension.
Dream of evading taxes and fleeing to a far-off foreign beach if you desire but remember that it is only a dream. It does not work that way in real life.
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Originally Posted at: https://www.moneytips.com/the-costs-of-paying-your-taxes-late