This is a question I have heard many times throughout the years. It is why JK Harris – and companies like ours – are in business. For a variety of reasons, taxpayers who cannot or do not file their income taxes and end up coming to us for help, once the IRS catches up with them.
With the current economy and the high unemployment rate, many taxpayers may be very tempted not to file their tax returns this year. It may seem like a money saver in the short term, but the money you save from not filing on time is only a temporary thing. Over time, it may end up costing you a lot more money.
You may argue that there are people who get away with not filing their returns. The fact is, the IRS catches up to these people, sooner or later. When they do, it is usually very expensive and very stressful. Penalties and interest on an IRS debt accumulate quickly and sometimes, for those who let a balance go unpaid for years, can become greater than the original amount of tax owed.
What are the penalties? If you owe, the penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
Another problem with not filing is the IRS may file a substitute return for you. Typically, these returns do not count any deductions and allow for only one exemption. This will raise your tax liability, which will in turn raise the penalties and interest on your account. (This can be corrected by filing the late returns, however you will still owe penalties and interest.)
So, what do you do if you know you owe and you cannot pay your taxes? Go ahead and file your tax return anyway. This prevents you from being fined for failure to file. Call the IRS or go to their website and download the form for an installment agreement. Filing for an installment agreement will allow you extra time to satisfy your tax debt and will keep you out of trouble with the IRS.