Filing your taxes is an unpleasant activity for almost everyone, even when you’re getting a refund — just seeing terms like “withholdings” and “qualified dividends” tends to have a mind-numbing effect. Fortunately, there are a lot of affordable online tools to help you file your taxes with minimal headaches. And this year, we had more time to take care of our taxes than usual, with the typical April 15th filing and payment deadline being pushed to July 15th in response to COVID-19.
But now, suddenly, July 15th is just a day away. If you need to file a last-minute tax extension request, you can still do that and give yourself until October 15th to file. If you owe taxes, though, you’ll need to pay an estimate of what you owe by tomorrow. The easiest, most accurate way to calculate that may simply be filing your taxes.
With the tax deadline so close, you might be wondering — what would really happen if you filed your federal tax returns late? Will the IRS come knocking on your door on July 16th?
If you’re expecting a refund, nothing will happen. The IRS guideline on late filing and penalties states clearly: “If taxpayers are due a refund, there is no penalty if they file a late tax return.” The only consequence will be that you won’t get your refund until you file your taxes. According to the IRS, it usually takes 21 days to receive your refund. If you’re claiming the Earned Income Tax Credit, it may take a bit longer than that. You can use the IRS’ online tracking tool to check the status of your refund. If you’re really late in filing, though — like, let’s say, three years late — your unclaimed refund may disappear.
If you owe taxes, filing late can really cost you. “Make no mistake — if you owe taxes, you will still need to pay in full by July 15th or there will be penalties, and you’ll start accruing interest,” says Christina Taylor, head of operations for Credit Karma Tax. Filing late is actually worse than paying late. The penalty for filing past the deadline is 5% of your unpaid taxes for every month you don’t file, capped at 25% of owed taxes. That doesn’t mean you’ll only get a penalty if you’re late a full 30 days, though. The penalty can apply for part of a month. If you file more than 60 days late, you will pay a penalty of whichever amount is smaller: $435 or 100% of your owed taxes.
There’s a penalty on paying late, too. If you file and pay your taxes past the deadline, two separate penalties can apply. The penalty for late payments is 0.5% for every month you have an unpaid balance left, also capped at 25%. If you can’t pay in full by tomorrow or soon after the deadline, you should let the IRS know. “You can set up an Installment Agreement with the IRS, where you pay a small or significant portion of the amount you owe each month,” says Taylor. “The IRS has two different installment agreement options available to most taxpayers: short-term and long-term. Both come with associated fees to set them up (which can be waived if you qualify for the low-income option), but it’s worth it to know that you’re paying on your tax debt and that you’re in good standing with the IRS.” Getting on an installment payment plan can drop your penalty to 0.25% instead of 0.5% of the unpaid balance.
Interest will add up fast. On top of penalties, interest accrues on your owed taxes. The interest rate is set every quarter, at 3% plus what’s called the federal short-term interest rate. Interest is compounded daily, meaning it can quickly rack up on top of your penalties.
If you still haven’t filed or paid taxes with tomorrow’s deadline looming, the big takeaway is that you shouldn’t just do nothing. The IRS is often willing to work out a plan with people who are struggling to pay but showing an effort. “If you thought you would have the money to pay your taxes, but you end up not having enough to pay, you can always call and ask the IRS for a delay in collection, or ask for a reassessment of your tax debt,” says Taylor. “There’s no harm in explaining your current situation and seeing if you can get a delay on repayment or have your tax debt reassessed.”
For people who truly doubt their ability to pay their taxes — if you owe a huge amount and already have a lot of debt, for example — there are other options as well. “There’s an IRS program called ‘Offer in compromise,’ where you can offer the IRS less than the amount you owe to pay off your tax debt,” says Taylor. “You can visit the Offer In Compromise Pre-Qualifier tool to see if you may qualify for this program. This is normally a good option for taxpayers who have little in the way of assets and/or income.”
On the other hand, ignoring and avoiding your tax liabilities can have more serious consequences than penalties and interest. “There is the potential for jail time if the IRS thinks you’re actively evading taxes,” notes Taylor. “Err on the side of caution and file your taxes on time, even if you know you owe and can’t pay it all at once.”
Like what you see? How about some more R29 goodness, right here?