There is a difference between failing to file and failing to pay your taxes. Which one is worse and costs more in penalties and fines? What should you do if you didn’t do either this year? Should you ignore it and just do better next year? Should you panic? You may have all the questions and more- we get it! So let’s wade through them and get some clarity on what to expect and what you can do if you don’t file or don’t pay.
If you’re stuck in a tax situation, go ahead and take a deep breath… the world won’t end if you don’t file on time. We’re not recommending you do that, but know that there is always hope and a solution. Depending on your circumstances, there can be financial consequences involved, but your tax resolution specialist at Axiom can work through that with you.
There is one situation where not filing on time isn’t completely bad news. If you owe nothing in taxes or if you are owed a refund, you are not required to file your taxes. If you do file late, there is no penalty. However, if you are owed a refund and don’t file within three years of the associated tax date, you won’t get your refund and the IRS gets to keep it. So you don’t have to rush, but if you want your refund, you might as well do it.
The Difference between failing to file and failing to pay
There is a difference between failure-to-file and failure-to-pay. And, oddly enough, it will cost you more in penalties for failure to file.
- Failure to file
If you fail to file your tax return on time, the IRS can and will penalize you a late filing fee. The fee is usually about 5% of the taxes you owe for each month past tax day that you fail to file. The penalty maxes out at 25%. However, if you don’t file within 60 days of the due date, the minimum penalty is $210 or 100% of your unpaid tax, whichever is less. Therefore, if you owed $210 in taxes and you waited 60 days to file, you wind up paying $420 total. Avoid paying double by at least filing your taxes. The payment part comes later.
There are extenuating circumstances under which the IRS will waive late filing penalties. Examples include disaster victims, military service members and eligible support personnel in combat zones, and U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico.
Failure to Pay
Penalties for failing to pay your taxes on time are actually lower than for filing late. For each month past the payment date you will be assessed 0.5% of your total tax bill as a penalty. This fee also maxes out at 25% of your tax bill. Keep in mind that if you don’t pay on time, interest accrues. So not only will you have to pay penalty fees, but also the interest on your unpaid taxes.
Interest begins to accrue on unpaid taxes one day after the bill was due. Interest compounds daily until the bill is paid in full. The rate charged is the Federal short-term interest rate plus 3%. If the rate goes up before you pay in full, your interest rate goes up too. You can reduce the interest by paying as much as possible on time. The less you owe, the less you will have to pay extra.
What if you didn’t do either? Will you have double the penalty and fees? If you fail to file as well as fail to pay on time, the failure-to-pay penalty is waived and you only pay for failing to file.
Still, it’s important to understand that filing on time is the most important thing you can do. You either need to file your income tax forms on Tax Day before midnight or you need to file for an extension. However, if you file for an extension, that’s only for filing your tax forms. You’re still expected to pay on time.
What’s the Worst That Can Happen?
Unfortunately, if you don’t file your taxes or file for an extension, you will accrue penalties that can be up to 25% of the taxes you owe. If you owe $5,000, your penalty will be $1,250. If you completely neglect to pay your taxes and ignore the IRS, the government can start garnishing your wages, placing liens on your property, and start talking about jail time.
Obviously, you’ll want to avoid that at all costs, so it’s critical that you contact Axiom Tax Resolution Group as soon as you have a tax concern instead of avoiding it and running in the opposite direction. We’re here to help you!
The best thing you can do is to file and pay as soon as possible to avoid building up penalties and interest. Not to concern you, but Tax Day 2021 is only a few months away (already?), so act now before not filing becomes a pattern and a cycle that’s difficult to get out of. Put a process in place right now to keep up with all your documentation so that you’ll be ready to file, even if you’re not sure you’ll be able to pay. Let the tax resolution specialists at Axiom Tax Resolution Group help you out! Contact us today!