Don't Mess With Taxes

Missing a deadline can be frustrating. Missing a tax deadline also can be costly, thanks to penalty and interest charges. (Photo by Anton Malanin on Unsplash)

In most cases, if you missed the Oct. 15 tax extension deadline and didn’t owe any tax, then you don’t have to worry about penalty and interest charges. Those are calculated based on the amount of tax due.

The late payment penalty is 0.5 percent of your unpaid balance per month or partial month, capped at 25 percent.

The failure-to-file penalty is even steeper. It’s 5 percent of unpaid taxes per month or partial month, up to 25 percent.

Interest charges on your unpaid taxes also will continue to accrue. And, oh yeah, the Internal Revenue Service also charges interest on penalty amounts.

In situations where you don't file a return and don't pay your tax, the IRS assesses a 4.5 percent charge, instead of the usual 5 percent, for not filing along with a 0.5 percent for not paying.

Sounds like you're getting a bit of a break, right? Wrong, especially if you don't take steps to resolve your taxes.

The total failure-to-file and failure-to-pay penalties can eventually add up to 47.5 percent of what you owe: 22.5 percent for late filing and 25 percent late payment of the tax owed.

The penalties are assessed, and lifted, separately. If you file but don’t pay your tax bill in full, the non-filing penalty stops, but the non-payment assessment, and interest charges, continue.

So, if you missed this week’s tax filing extension deadline and still owe Uncle Sam some money, at least file the form. That will stop the higher non-filing charges.

As for the non-payment assessment, if you can’t pay your full tax liability, pay what you can. Any portion will reduce the amount upon which the penalty charges are based.

Then check into IRS payment plans to help you start whittling down what you owe.

Benefits of filing a return: And what if you don’t owe? As noted, you won’t face a financial punishment, since any penalty percentage amount times zero dollars owed is nothing.

Still, it's a good idea to file, preferably on time, either April’s Tax Day or by the extension deadline, just to follow the law.

Getting your tax paperwork into the system even if you don’t owe will keep the IRS happy.

It also could be to your benefit, now and for future filings.

Completing a tax return could turn out to be a good surprise. Did you have income tax withheld from your pay? We might be able to get our paycheck withholding amount close to our actual final tax liability for the year, but very few of us — in fact, probably no one ever — has paid via withholding the precise tax-due shown on our returns.

So if you don’t owe, you probably are due a refund. The only way to get that money is to file a Form 1040.

Also, if you don't file one year, but do the next because you know you're getting a big refund, your prior missed filing could be a problem. The IRS holds income tax refunds in cases where its records show that one or more income tax returns are past due. The refunds are held until the IRS gets the past due return or receives an acceptable reason from you for not filing an overdue return.

If you're self-employed and don't file, you could put your Social Security benefits at risk. Not filing means your self-employment income isn't reported to the Social Security Administration, and you won't receive credits toward Social Security retirement or disability benefits.

You might qualify for some tax credits, some of which are refundable. That means even if you don’t owe, the tax credit amount could produce a refund for you. For example, the Earned Income Tax Credit (EITC), available to lower-earning taxpayers, is a refundable tax credit that many eligible taxpayers too often overlook.

Finally, many loans depend on the information you provide on your annual tax return. That includes mortgage or home refinancing applications, business loans, and federal aid for higher education. If your tax filings aren’t up to date, that could slow down or nix your loan requests.

The bottom line, literally, is that even if you owe, it’s usually to your advantage to file a tax return. Doing so on time is preferable.

But if you missed the deadline(s), file and pay what you owe as soon as you can.

You also might find these items of interest:

• Do you have to file a tax return? Probably
• 8 reasons to file a federal tax return, even if the IRS doesn't require it
• Oct. 15 tax filing extension deadline extended for disaster area, and other, taxpayers

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