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What happens if I file my taxes late?

Filing your taxes late is usually not a good thing for a few reasons. IF you are going to owe taxes filing late or not filing can hurt you.

Understanding the Tax Deadline

The IRS will assess penalties and interest.

The worst penalty when you file late is the “failure to file timely” penalty. To avoid this penalty file TIMELY.

The normal filing deadline is April 15 th of each year but that can be later if it falls on a weekend.

Filing an extension will give you until October 15 th to timely file but the extension needs to be filed before the normal deadline (usually April 15th).

The second worst penalty for late filing is the failure to PAY timely. Taxes are due by April 15th (or later depending on the calendar). Any taxes due after April 15th will have this penalty added to your tax balances. Even if you get an extension to file, your taxes were still due by April 15 th . If not paid on time you will still get hit with this penalty even if you file by the extension deadline.Interest will be added to your case from the date the taxes were due for any unpaid taxes.

The IRS can file a Substitute For Return (SFR) for you which is the IRS filing for you with no deductions, credits or exemptions. The scary part about SFR returns is you might not even owe at all! If the IRS thinks you might owe they can file a SFR return and then collect against you.

The most typical instances of this are when someone has mortgage interest reported from a mortgage, wins from gambling (even if the losses are greater than the wins) or investing in markets or digital currency. Once the IRS files an SFR against you they will take collection actions against you as if it is the correct debt.

What to do to avoid problems:

1. Every year keep close track of where you get income from. By February you should start getting tax documents (W-2s or 1099s, etc.) from these sources.

2. File your taxes on time. Reach out to a tax professional early! The best ones are usually the busiest and the longer you wait the harder it will be to get your taxes prepared.

  • If you need to file an extension that is fine – just make sure it is done before April 15 th .

3. Pay your taxes early – either through estimated taxes through the year or have the money set aside to pay your taxes.

4. You can almost always AMEND your tax return. It is better to file something – and then amend your tax return if you miss something. As long as you amend your tax return quickly you shouldn’t have a problem with the IRS.

If you still get hit with Penalties and Interest call Guardian Tax Law to see about removing them or what options you might have.

If I file late can my refund be delayed?

If you file your tax return late it is always best to file your late tax return. You can efile for the last three (3) years. Any tax return filed more than three (3) years late will not get any refund issued.

To sum up: Don’t wait too long for refunds or you can lose them!

Also, the IRS processes the current year tax returns the fastest. Older tax returns can take six to nine months to process.

Do penalties and interest increase over time?

If you owe the IRS when you file a late tax return penalties and interest will be assessed going back to when the return was supposed to have been filed. Penalties and interest will also be charged going forward until the debt is paid off.

Penalties and Interest currently stands at around 7% compounded daily. The IRS interest rate also is expected to continue to climb as inflation continues.

Does IRS debt affect my credit score?

IRS debt can affect your credit score if a tax lien is filed. After a tax lien is filed the debt is reported to the credit agencies and will show up whenever someone pulls your credit.

A tax lien can be filed when you owe a tax debt and do not have a resolution in place. Some resolutions trigger a tax lien as well. If you cannot afford to have a tax lien filed speak with a Tax Professional right away.

Exceptions and Relief

Relief from Tax Liens

There are a few programs that can be used to eliminate penalties and interest.

1st Time Penalty Abatement

Penalties and Interest can be removed from a tax year if the following conditions are met:

  • The taxpayer didn’t have any penalties or interest assessed in the prior 3 tax years.
  • The penalties and interest must be for failure to file timely, failure to pay timely and accrued interest.

You can remove penalties and interest for multiple years, but the above conditions must still be met.

It is very difficult to know if a taxpayer qualifies for this abatement before calling and reviewing the case history with the IRS. The IRS computers run a program and if the tax debt does not meet the criteria needed the abatement will be denied. IRS representatives have little to no control over this process.

Example:

Taxpayer owed for multiple years. We were able to remove penalties and interest for a 2016 tax balance and a 2020 tax balance. Each tax year met the above criteria.

Example 2:

Taxpayer owed for one year and could not get a 1 st time abatement because they had a penalty in the previous year for less than $1.00.

843 Abatement – Reasonable Cause

What is reasonable cause? Reasonable cause is an extreme event that prevented a taxpayer from being able to address their tax responsibilities on time.

Examples:

Death of a family member who handled the taxes, divorce and loss or tax documents, fire/flood/natural disasters, extreme illness such as cancer, depression/mental illness, fraud by tax professionals, etc. The cause must be severe and well documented.

How do you apply for this abatement?

You must submit a form 843 with the cause detailed out. Any substantiation will need to be submitted with the form. A separate form must be submitted for each tax year.

How long can this process take?

The IRS can take 9 to 18 months to consider an 843 abatement.

Example 1:

Owner of a golf course was given bad tax advice and incurred a penalty of over $100,000.00. We were able to remove the entire penalty with this abatement.

Example 2:

A high dollar case had a tax professional not perform his duties for years. When the problem was discovered every attempt was made to address the situation. We removed just under $250,000.00 in penalties and interest.

Offer In Compromise

An Offer In Compromise can remove not only interest and penalties but also the entire debt. This is an attempt to settle a debt for less than the amount owed. This is a very involved process in most cases. If you have any questions call a tax professional!

Example 1:

Retired widow on Social Security inherits $300,000.00 while doing an Offer In Compromise. $60,000.00 debt settled for $20.00.

Example 2:

Working electrician settled $147,000.00 debt for $20.00.

Example 3:

Working realtor settles $120,000.00 debt for $4,000.00.

If you don’t owe taxes, don’t worry. No penalties and interest will be charged to your case. However, refunds will only be issued for the last three (3) years of tax returns.

If you OWE taxes, Penalties and interest will be assessed for late filing and for late payment if the balance was not paid by the tax deadline for that year. (April 15 th or just after).

What to Do If You’ve Filed Late

It is always better to file an extension which will give you until October 15 th to file your personal tax returns. If you fail to file an extension or still miss the extension deadline you have a few options.

Can You pay the debt?

If you can just pay off the debt I would in most cases as initial penalties and interest are high. Ongoing penalties and interest can be as high as 20-30% if nothing is arranged on a case.

If you cannot afford to pay off the debt

Setup an Arrangement/Resolution on the case asap to get your case out of IRS collections. Ongoing penalties and interest is 7% currently but also protects you from bank levies and wage garnishments. This can be an Installment Agreement or Non-Collectible status where you pay $0.00 to the IRS for 2 years.

If you qualify, you might be able to settle your balances through the Offer In Compromise program.

Even with Installment Agreements, taxpayers often do not have to pay the full amount of the taxes owed. 

Can I get penalties and Interest removed?

Often the answer is yes, but it depends on your tax history. Review this with a tax professional to see what you can get removed.

What can I do to avoid filing late?

  1. Keep track of contact information for income sources.
  2. Every year around the start of February tax documents should be mailed out. Match those to your income sources/mortgages/student loans, etc.
  3. It is better to file an incomplete tax return timely and then amend it later if you do not have all the correct information.
  4. If you are missing W-2s or 1099s you can get this information from the IRS. This year transcripts were available May 25th.

When you are confused or not sure about your taxes

Don’t be afraid to look for a competent tax professional. We refer to good affordable CPAs and Bookkeepers all the time.

To expedite any refunds e-file where possible. If you cannot e-file tax returns can be faxed in to the IRS.

When in doubt get some free advice. At Guardian Tax Law we provide free no pressure tax consultations as well as free advice on a regular basis.

Conclusion

Our first goal with every taxpayer is to deal with the immediate problem – usually back taxes owed. Once we solve the immediate problem, we also work hard to make sure that taxpayers do not fall back into the same traps and pitfalls that created the initial problems.

Staying current on tax filings is absolutely necessary to not having to worry about the IRS or State taxes again! 

Filing taxes timely will not only save you money on penalties and interest, but it will also help you from needed a Tax Attorney! Trust me, we are not cheap!

What to do: Put all tax documents in one file in a safe place. Scan them in so you have a digital copy. If self-employed keep all of your business receipts and make sure you are not mixing personal and business expenses.

When you have questions? Call a Tax Professional and get some advice! We give free advice all the time and would much rather you call when you have questions than step in a bear trap and have a huge problem. Call Guardian Tax Law to get that much deserved Peace of Mind.