Some people say they work best under pressure and choose to procrastinate on important tasks like filing taxes. Then there are those who simply forget to file by the April 15 deadline -- or deliberately avoid doing so.
Everyone makes mistakes, especially when under the stress of gathering documentation, crunching numbers and lowering tax liabilities as much as legally possible. However, avoiding your annual tax return obligations can result in costly consequences that extend beyond your bank account.
1. Late penalties
Considering the importance of filing your tax return, it's fair to expect some degree of penalty for failing to file your taxes. If you are expecting an income tax refund, chances are you won't get the same level of scolding from the Internal Revenue Service that others who owe money can expect to receive.
However, if you fall among the people who owe the government money, it's time to shake a leg and get your tax return in as soon as possible.
The penalty for filing late takes effect immediately following the April 15 deadline and will typically equal 5 percent of the unpaid taxes you owe for every month you delay filing your return, up to a 25 percent cap.
A less hefty penalty of 0.5 to 1 percent of your unpaid taxes per month applies to taxpayers who file by the deadline, but owe taxes and don't pay up. Even if you can't afford your taxes now, it's best to at the very least file your tax return on time.
Those who both file late and fail to pay for the taxes they owe are charged a maximum penalty of 5 percent of their unpaid taxes for every month the bill is late.
2. Delayed reimbursement
With spring vacations around the corner, you'll likely want to keep all the money you can. Those who wait beyond the eleventh hour to file taxes and claim their refunds may not only get dinged with a late-filing penalty, but holding up refunds does an equal disservice.
Ever hear people preach about not giving Uncle Sam an "interest-free loan?" By failing to file your taxes, you're only prolonging this financial injustice against your wallet. Essentially, you're giving up the ability to save or invest that money at a higher return.
3. Forfeiture of tax refund
Just because you don't owe the IRS money doesn't mean you can keep your refund on hold indefinitely. When you're owed a reimbursement from the government, its in no rush to pay you back. In fact, Uncle Sam will give you three long years after the tax year for which you filed to claim your back tax refund.
After this generous window, however, the IRS will consider your unclaimed refund a generous "donation," and you'll be out of your rightful cash.
4. Substitute for return
Individuals who fail to submit their tax return by the deadline (or extension deadline, if applicable) aren't in the clear yet. In fact, the IRS will attempt to contact delinquent tax filers repeatedly and remind them to file their tax returns.
If their efforts fail, the IRS reserves the right to file a substitute for return on behalf of the filer. The form calculates the amount of taxes owed based on taxable income, plus any applicable penalties. Payments made to self-employed individuals are also used in SRF computations, as are dividends paid on investments.
But a substitute for return isn't necessarily conducted in filers' best interest. This course of action does not take into account tax credits and deductions that may reduce your taxable income, which means you may be overpaying on your taxes in the end.
If you receive a bill from the IRS indicating that it performed an SRF, you can still file your tax return to claim your deductions and expenses. The IRS usually will make the appropriate corrections.
The consequences for ignoring an IRS bill can be a lot more dire than warning letters. After sending multiple correspondences regarding an unpaid tax bill, the IRS will send a representative to your residence or business to collect payment -- typically if you owe $25,000 or more.
Continuing to avoid this responsibility can result in automatic wage garnishments, asset seizures like your car and may even lead to arrest and jail time for tax evasion.
At the end of the day, you're better off filing your tax return late than never filing it -- or paying your taxes -- at all.
Jennifer Calonia writes for GoBankingRates.com, a source for online banking, the best CD rates, savings account rates, personal finance news and more.
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