Each year many Americans don’t bother filing their tax returns. There are couple of problems with that. One is that if you worked that year, your employer was withholding taxes from your paycheck. You technically paid taxes along the way and filing taxes is simply assessing whether or not you paid enough. It is possible that you contributed more than your fair share and qualify for a refund. The other aspect of not filing your tax return are penalties associated with that.
The IRS can legally access two types of penalties. They are:
- Failure to file – this penalty is based on the amount of tax you owe and is 5% per month, up to 25% of the unpaid tax
- Failure to pay – this penalty is for any taxes not paid by the deadline and is generally 0.5% of the unpaid tax amount per month. It has a limit of 25% of the unpaid amount
Many taxpayers request an extension to file taxes each year. This step can help avoid failure-to-file penalties, but it does not relieve the taxpayer from the responsibility to make payments on any amount owed.
The deadline to file federal taxes for individual tax payers was extended to May 17, 2021. Keep in mind that even though many states extended their deadlines to file to align with the federal filing deadline, not all states may have followed the suit. Estimated taxes for the first quarter are still due on April 15, 2021.
Many taxpayers have been hard hit by the pandemic and may not be in condition to pay. There are solutions to make mitigate this temporary setback and minimize the penalties. Here are some options the taxpayers have:
- Payment plan – it typically benefits a taxpayer to be proactive and responsible about the taxes owed. For once, if the IRS agrees to a payment agreement, your penalties can be cut in half.
You can now complete a request for a payment plan online, and you get an immediate response once your application was approved. There is a short-term (120 days or less) and long-term (installment agreement) currently available. Click here for more details.
- Offer in compromise – eligible taxpayers can submit a request to settle their tax obligation for a lesser amount. Whether or not the request gets approved depends on factors such as status (have you filed tax returns or paid estimated taxes; are you currently in bankruptcy proceeding), your assets, income, and expenditures
- Temporarily delay collection – this option shields taxpayer from the collection process that usually gets postponed. The IRS may grant you this protection if it determines your current situation does not permit you to pay taxes. Important: this doesn’t eliminate your tax debt, but merely postpones it. Interest and penalties may still be charged until the debt obligation is settled with the IRS.