If you’re behind on your bookkeeping, you may end up having to file taxes late. Here’s what to expect.
What is the penalty if I fail to file?
If you fail to file your taxes by the deadline, you may face penalties imposed by the IRS. The penalty for filing taxes late, also known as the failure to file penalty, is a consequence of not submitting your tax return on time. It’s important to note that this penalty applies even if you owe no taxes or are due a refund. The IRS penalty for not paying taxes on time is separate from the late filing penalty and is assessed if you fail to pay the taxes owed by the deadline. Both penalties can add up and create financial burdens if left unresolved.
What is the penalty for filing taxes late?
Let’s say you missed the filing date for your federal tax return. You owe the IRS money, and you’re panicking just a bit. Your first step is to take a deep breath and think calmly. Late tax filings happen, and you can set things to rights again—although you will have to pay certain penalties or fees.
There are two possible penalties in this situation: a late filing penalty and a late payment penalty.
The amount of these penalties will be determined by how much you owe the IRS and how late your tax filing is. It stands to reason that the more you owe and the later the filing, the more expensive the penalty might be.
- The IRS penalty for not filing your tax return is 5% of the unpaid taxes for each month your taxes remain unpaid.
- The IRS penalty for not paying your business taxes on time is 0.5% of the unpaid tax amount every month.
If both penalties apply in the same month, the maximum penalty is 5% per month, which breaks down into 0.5% for a failure-to-pay penalty and a 4.5% failure-to-file penalty.
At most, however, each of these penalties will be 25% of the total tax you owe, and it takes a while to reach that point.
- The IRS will charge you the 5% for failure to file for five months until that total penalty reaches 25% of the unpaid tax amount.
- The IRS will continue to charge you the 0.5% failure-to-pay minimum penalty for 45 months until it also maxes out at 25% of the unpaid total.
When were 2022 taxes due?
The buzz about tax season starts right after the first of the year, but taxes aren’t actually due right away. Tax returns for 2022 were due April 17, 2023.
If you filed an extension, your due date was October 16, 2023.
It’s important to note that an extension moves the income tax due date for the paperwork—not the payment you might owe. The IRS will want its tax payment from you by April, regardless of paperwork extensions.
How you can avoid or minimize penalties
You can skip all IRS late-filing and late-payment penalties completely by filing and paying your tax balance due on time. Of course, we all know that life can get in the way sometimes.
If you’re doing your best to catch up, and you just didn’t get there before the deadline, consider these ways to minimize your tax penalties.
- File an extension. If the April deadline hasn’t yet passed, file for a tax extension and use those extra six months to get your finances caught up and organized for filing. Remember that an extension gives you more time for filing—not payment. Payment is still due by April 18. If you’ve already missed the deadline, you no longer have the option to file for an extension.
- File your taxes even if you can’t pay them yet. The penalty for missing federal tax filing is larger than the penalty for missing the payment. File your income tax return with the IRS and avoid the larger of the two penalties. There are many ways to sort out how to pay your taxes.
- Get help to file as quickly as possible. If you missed the deadline, penalties are creeping up every month. File as soon as possible, even if it means paying for help from a tax professional to sort out the numbers and get your tax forms prepared. The cost of bookkeeping and working with a tax agent may be far less than the increasing penalties for leaving your business income taxes unpaid.
However, a word of warning about trying to file as quickly as possible: it’s important to file your taxes as close to the deadline as you can, but it is just as important to file your taxes correctly.
Making a mistake in your tax preparation not only can cost you more in tax payments, but mistakes on tax forms are also one of the most common IRS audit triggers. If you’re already dealing with cleaning up a late filing and payment, you sure don’t want to handle an IRS audit on top of that.
Remember that cleaning up your tax bill with the IRS and sorting out those penalties applies only at the federal level. You still have a state tax obligation to sort out as well.
What if you can’t afford to pay what you owe?
The IRS is realistic about tax payments. They know that sometimes a tax burden is too high for a taxpayer to handle in a given year.
The IRS offers four different tax relief programs for business owners who find themselves unable to pay the full tax burden when filing.
Penalties show up when you fail to file and pay your taxes on time. A Penalty Abatement with the IRS, however, removes the penalties based on the IRS’s estimated tax amount. To file a Penalty Abatement letter, you must be current on your tax return filing and have a demonstrable, reasonable cause for the delay. This might be a death in the family, a loss of records, or a natural disaster, for example.
Tax installment agreement
Another option available is an installment payment plan you set up with the IRS. You get to pay your tax debt in a series of payments if the IRS agrees to the plan that you propose. While an installment plan may make paying your tax burden possible, non-payment fees will continue to accrue until the balance is paid in full.
Offer in compromise
In some tax payment scenarios, the IRS may accept an Offer in Compromise for the amount that you owe. This is essentially a counteroffer or negotiation with the IRS. They say you owe A, and you tell them you can only afford to pay B. There are some very specific requirements you and your business must meet to be considered for an Offer in Compromise.
Negotiating your tax debt as “Currently Non-Collectible” means you get an IRS-approved extension on your tax payment. This delay is approved based on your lack of ability to pay both your living expenses and your tax debt. This is not a debt-forgiveness program, however, and your taxes will be due later when your finances improve. The IRS revisits your case every tax year to check on your ability to repay.
Other payment options
If none of the IRS relief programs are the right fit for your situation, you do have other payment options. Bank loans, including personal loans or even credit cards, make it possible to pay off back taxes. Some business owners even prefer this method. They may pay taxes with a credit card for the credit card rewards, but then they pay the card’s balance off quickly to avoid interest payments.
But if you don’t have the money readily available to cover your tax payments, you may be looking at a steep interest rate and substantial fees. Consider using your line of credit as a final resort in this situation.
How to file taxes late
If you know you will file late, you can complete Form 4868 to request an extension. You don’t need to give any reason for why you’re filing late—if you complete this form, you get an automatic extension until October 15 to file your taxes without the late-filing penalty.
However, keep in mind that even if you receive the extension, you’re still required to make tax payments on time—in other words, if you know you’re going to owe taxes, you still are required to pay what you owe (or an estimate) by the standard deadline. If you don’t, you may incur other penalties.
If you’re a business owner who’s required to make quarterly estimated tax payments, you should still make your estimated tax payments on schedule regardless of your extension request.
It’s important to note that regardless of whether you’re granted the extension or not, you’ll still owe all your taxes, plus interest. Interest can add up fast, particularly on large balances, so don’t delay paying what you expect to owe if you’re able.
If your tax software doesn’t calculate this automatically, the IRS will do the honors and tell you their estimate of how much you owe via an official letter through regular U.S. mail.
If you did not request an extension, or you miss the extension deadline
If you didn’t request an extension or filed your extension request late, you will most likely owe penalties plus interest if you owe taxes. The IRS charges as much as 10 times more to late filers who don’t complete the form for an automatic extension.
The late-filing, or Failure to File Penalty is five percent of your unpaid tax balance per month. The late-payment penalty is 0.5 percent per month. If that’s overwhelming, here’s some good news: you won’t necessarily have to pay the entire balance right away if you can’t afford to do so—more on that in a moment.
While you may have seen the IRS arrest tax evaders in the movies, that’s extremely unlikely to happen to a typical tax filer, even if they are years late on paying their taxes. Because many people file taxes late, there are clear processes to guide you.
In the vast majority of cases, the worst thing that happens when you don’t file for an extension and file your taxes late is that you have to pay the taxes you already owed, plus interest and penalties.
The bottom line
Unpaid tax and unfiled tax forms can be costly, so it’s best to file taxes as soon as possible. Whatever reason you had for missing the April due date, you can’t go backward. Instead, focus on the future and what you can control today. It’s always worthwhile to spend the time and effort to file your tax return on time every year—and having accurate bookkeeping reduces the amount of both time, and effort you need to put in.