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Every spring, millions of Americans e-file or send in their paper forms to the Internal Revenue Service. But what happens if you don’t file your tax return? What are the penalties if you, for whatever reason, don’t or can’t pay the taxes you owe?
If you forget to file…
Do it as soon as you remember
This year’s deadline to file your tax return is April 18. If you miss the cut-off, don’t panic – just get online and file your return as soon as possible. The bad news is that you will have to pay a failure-to-file penalty, which will cost you 5% of what you owe on your federal tax bill. Still, the longer you wait, the higher that penalty will be.
If you decide not to file…
You’re going to get fined
If you decide to be a rebel, it’s going to cost you. By choosing not to file a return, you are choosing to pay the failure-to-file penalty, which totals 5% of what you owe on your tax bill, maxing out at 25% of the amount. For example, if your tax bill is $1,000, you’ll have to pay $50 per month up to $250.
If you file more than 60 days after the due date, the minimum you’ll have to pay is a $205 fee, or 100% of the unpaid tax if you owe less than $205.
(Note: If both the 5% failure-to-file penalty and the 0.5% failure-to-pay penalties apply in any month, the maximum penalty you’ll pay for both is 5%.)
The IRS will do it for you
Did you know that the IRS will file a tax return for you? If you don’t file, the IRS will get your W-2 and 1099 forms, use the standard deduction and send you a letter detailing what you owe. It sounds like an easy way to skirt your responsibilities, but it could have an unexpected outcome. “The IRS doesn’t know all of the deductions you’re eligible for, so your tax liability could be higher,” said Lisa Greene-Lewis, a CPA with TurboTax. “You want to file your own taxes so that you can claim what you deserve.”
Say goodbye to your refund
In 2016, the IRS reported that 70% of taxpayers received tax refunds with an average payment of $2,860. If you don’t file, you could be missing out. “The IRS reports that they have $1 billion in unclaimed refunds every year,” says Greene-Lewis. “People think they are going to owe money, but if you paid federal taxes and you’re eligible for credits like the Earned Income Credit, you might have some money coming back to you.”
People who make less than $10,350 (for singles) or less than $20,700 (for married/joint filers) are not required to file a federal tax return. Still, if you paid federal taxes, you may still be eligible for a refund.
Come up with a good excuse
The only real way to avoid paying a late-filing or late-payment penalty is to show reasonable cause for not getting your return in on time. The IRS doesn’t list specifics, but states that exceptions can be made if the taxpayer is experiencing a significant hardship. CPA Jay Porter says these situations are rare, and special provisions are typically very formalized. “After Hurricane Sandy the IRS gave the people affected a few extra months to get everything in order because their homes and records were destroyed,” he told Yahoo Finance.
If you file, but don’t pay…
You’re going to get fined
Let’s say you file your taxes, but your tax bill is more than you expected. You may want to ignore the bill, but that will only end up costing you more. The failure-to-pay penalty is 0.5% of your unpaid taxes per month, and it can build to as much as 25% of your unpaid taxes.
Additionally, the amount you owe will accrue interest charges. Interest is compounded daily and accumulates on the owed amount at an interest rate equal to the federal short-term rate, plus 3%.
With that said, you do have some options when it comes to paying your tax bill. If you don’t have the money, the IRS will allow you to set up an online payment plan if your income tax, penalties and interest are less than $50,000. There’s also the option to “Offer in Compromise” which allows you to settle your tax debt for less than the full amount you owe. The IRS will consider the offer based on the taxpayer’s income, expenses, ability to pay and asset equity.
The IRS will find another way to get paid
Choosing not to make payment arrangements could lead you down a long and stressful path. Do nothing, and the IRS will get more aggressive when it comes to getting their money by offsetting your tax refund or even garnishing wages.
An extension won’t save you
The IRS allows you to apply for an extension to file your tax return. But this must be done before the April 18 deadline. While this luxury gives you more time to file your tax return, it doesn’t grant you an extension of time to pay your taxes – just to file your return. April 18 is still the deadline to pay the taxes you owe, and if it’s not done by then you’ll be charged the failure-to-pay penalty.
They could come after your passport
If you filed your taxes, but don’t want to pay your tax bill, it could impact your next international vacation. A new rule from the IRS states that if you have a seriously delinquent tax debt totaling at least $50,000, the IRS can send a certification to the State Department who then has the right to revoke your passport. Additionally, the State Department also reserves the right not to issue or renew your passport if they get the certification from the IRS.
This law was passed in 2015, but will be implemented in early 2017. There is one silver lining, though. Before the State Department denies your passport it will give you 90 days to resolve the issue by paying the debt or setting up a payment plan.
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