Ballpark Estimate: Penalties and interest increasing amount owed by 25% +
Have you filed your taxes yet? If not, the deadline to do so is midnight on April 15, but the Internal Revenue Service recommends that people submit their tax paperwork even sooner if possible. This is good advice because if you owe the government money, procrastinating beyond that date comes with tax penalties. And if you are don’t owe anything on your taxes but are lucky enough to be expecting a tax refund, the earlier you file taxes, the quicker you’ll get your money back.
Getting a Head Start on Your Taxes
For many people, filing their taxes is about as appealing as going to the dentist. But of course it is also a necessary process for most Americans, and the sooner you get it out of the way, the better off you will be. In fact, beyond the relief of finishing your taxes for another year, there are several direct benefits you receive as a direct result of filing your taxes.
The first, and most obvious, benefit is of course if you are getting a tax refund. About one third of all taxpayers get a tax refund because they had too more money withheld than they ultimately owed or they paid too much in estimated taxes. In either of these scenarios, you have three years to claim a tax refund. After that time, you risk forfeiting your right to this money.
The same timeframe applies when it comes if you qualify for a tax credit, such as the Earned Income Tax Credit, which is a credit provided for taxpayers whose income is below a certain amount and varies depending on the person’s filing status and number of dependents.
Further, if you are self-employed, when you file for your taxes, you earn credits toward Social Security retirement and disability benefits.
Finally, when you file your taxes for 2007, if you meet the eligibility requirements for the 2008 Economic Stimulus payment, you will automatically be entered into the system to receive this additional rebate, which is up to $600 for an individual or up to $1,200 for a married couple, plus an additional $300 per child.
When You Owe On Your Taxes
If you owe money back to the IRS, you are expected to pay the amount due in full when you file your taxes. The paperwork and money must be sent in by the April 15 date. Keep in mind that if you miss that deadline, the amount you owe will increase as a result of penalties and interest that is accrued for being late. (See “The Cost of Being Late” section below for more details on this.)
You can pay your income taxes through several approved methods. For instance, you can use the U.S. Department of Treasury’s Electronic Federal Tax Payment System (EFTPS) to electronically transfer money from your bank account. You can also pay via credit card through the Official Payments website or Pay1040. Both of these vendors are approved by the IRS for this purpose.
If you prefer to send a personal or cashier’s check or money order, the funds should be made payable to the United States Treasury. Also be sure to include the necessary information on the check, such as your social security number or employer identification number, tax period, and the associated tax form number.
If you prefer to pay in cash, you can do this in person through a local IRS branch.
When You Can’t Pay In Full
If you can’t afford to pay the full amount you owe in income tax, you should still file your tax paperwork by the date it is due and explain your personal situation to an IRS representative to find out what your options are. For instance, you may be able to pay a portion Cost For Filing A Late Tax Returnof the amount due and then arrange an installment or payment plan for the balance. You could also request an extension on your taxes. In certain cases, the IRS may even agree to a temporary delay or consideration of a significant hardship. It is important to note, though, that the federal government has the right to file a tax lien against you until you have settled your bill. Finally, if there is a question of whether your tax bill is correct, or whether you will ever be able to pay the full amount, you may be able to arrange a compromise on the total taxes due. However, if you do agree on a compromise and then default on the negotiated amount, the IRS can sue you and come after you for what the amount you had originally owed on your taxes, plus accrued interest and penalties, too.
If you can’t work out some kind of payment arrangement with the IRS to pay your taxes, you may still have a few more options available. Some people take out a credit card cash advance, a home equity loan or personal bank loan, or even borrow from their retirement funds, to settle their income tax bill. While none of these are ideal options and each one comes with its own cost, when you do the math, you might just find one of these methods makes more sense than accruing penalties and finance charges on floating the balance you owe the IRS on your taxes.
You should also be aware that in certain cases of nonpayment, the IRS can garnish your wages, leverage your bank account(s) or require you to sell your mortgage or other assets to cover the tax bill that is due.
You might also have seen instances on movies and on television shows where the IRS puts delinquent taxpayers in jail. In real life, though, this is a less likely occurrence. The IRS usually pursues other options first and saves that for a last resort for more extreme cases.
Cost of a Late Tax Return
If April 15 has come and gone Cost For Filing A Late Tax Returnand your taxes are late, you probably wonder what the consequences will be. A lot depends on your personal financial circumstances. If you don’t owe any money to the IRS, you have three years to file your income tax return without accruing any tax penalties. One important thing to note, though, is that if the IRS does decide to audit you for that year, they may also look at your records for the following years up through the day you actually filed. So while this won’t cost you anything as long as your records are correct, you could be opening yourself up to a lot of extra inconvenience.
If you do owe money, though, then being late on your taxes does come with a cost: interest and penalties on the unpaid taxes. In fact, experts estimate that on average, the interest and fines on late taxes can add another 25 percent to what you owe, and in some cases, even more.
Here’s how the penalties for filing taxes late adds up:
- Tax Interest: The tax interest is calculated from the date the taxes are due (April 15) until you have settled your balance. This rate (which is determined quarterly) works off the federal short-term rate plus adds an additional three percent. The tax interest is also compounded on a daily basis. In recent years, the rate has ranged from 4 to 9 percent.
- Tax Penalties: Tax penalties are 0.5 percent of what you owe (which is capped when it reaches 25 percent of the total you owe in taxes) until it is paid in full.
- Installation Plans: If you set up an installment plan with the IRS, in addition to the tax interest and tax penalties you will owe, you will also incur a set-up fee of $43. This will be billed separately.
Getting an Extension for Filing Taxes
It’s possible to apply for an extension of the time you have to pay your taxes, but it is difficult to get such a request approved by the IRS. Cost For Filing A Late Tax ReturnIf you do plan to try, you must apply for this status by or before April 15. You also have to provide a detailed list of all of the assets and liabilities you had at the end of the preceding month, as well as a list of all money going in and out of your household for the past three months. Further, you must be able to prove that paying your taxes right now would result in an undue hardship for you and that you don’t have any means to get the money at the moment. If an tax extension is granted, it will usually be limited to six months. In addition, you may have to put up some personal property as collateral until this debt is settled.
Worth a Note
If you find yourself repeatedly missing the deadline to file your taxes, you may be in for an unpleasant surprise, as the IRS is stepping in and preparing tax returns for some people who repeatedly choose not to comply with the law. In cases such as this, you may find that the prepared doesn’t give you the tax deductions and exemptions to which you would have been entitled. In addition, you will also be charged the appropriate tax penalties and interest as well, and if this happens multiple times, you may find yourself subject to harsher enforcement measures.
If you have questions about filing your taxes or need help with them, you should contact a CPA, accountant, tax attorney or the IRS. You can also visit the IRS website or go to LateFile to read more about filing late taxes and to access tax extension forms.
Disclaimer: If you’re planning on filing your taxes late, do not rely solely on the following information. Consult a tax attorney.