Now that April 15th is officially in the rear view mirror, most taxpayers are breathing a sigh of relief. But for those that haven't filed yet, the sleepless, Pepto Bismol filled nights are just beginning. Often times, people think that if they can't afford to pay their tax debt they should avoid filing their tax return and hope that they can disappear quietly into the night. This is not the case.
File late, or not at all? A run down of penalties
If you are due a refund there is no penalty if you file a late return. I’d wager to bet that the IRS would love it if everyone due a refund decided to be less law abiding citizens.
If you owe tax and you failed to file and pay on time, there are two separate penalties that may apply. The first if for filing late, and the second is for paying late. It’s important to know that interest accrues on top of the penalties and it can add up fast.
If you end up filing your tax return more than 60 days after the due date (or extended due date), the minimum penalty is $205. If you owe less than $205, the penalty would be 100 percent of the unpaid tax. Otherwise, the penalty can be as much as five percent of your unpaid taxes each month up to a maximum of 25 percent. Filing on time and paying as much as you can will keep your interest and penalties to a minimum; so file even if you can’t pay.
If you pay your taxes late, the penalty is generally 0.5 percent of your unpaid taxes per month. This can build up to as much as 25 percent of your unpaid taxes.
If the late filing and late payment penalties apply, the maximum amount charged for the two penalties is 5 percent per month.
If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April due date.
As under-staffed as the IRS is, it's not worth taking a chance to see if you can 'get away' with not filing your tax return. If and when they find you, not only will you be dealing with penalties, but the IRS will prepare a “Substitute Filed Return”. It will based off of W-2s, 1099Ss, K1s, and whatever other forms that they can get their hands on. Unfortunately for you, these forms will likely show that you owe more than what you would if you had filed your return through the proper channels from the start.
If you fail to respond to the IRS’s proposed assessment, the 'notice stream' of the collection process kicks into full swing. Then you have to worry about levy's, lien's, and wage garnishments.
There are options
Currently Non-Collectable Status (CNC)
CNC means that you don’t have to make any payments to the IRS, aside from your current withholdings or estimated tax payments. The IRS will look at your “Reasonable Collection Potential” (RCP) to decide if you qualify.
Partial Payment Installment Agreement (PPIA)
A PPIA is what you may qualify for if you have too much of an RCP for CNC (in other words, when your income and assets are too high to reasonably land you in non-collectable status). A partial payment installment agreement means that instead of not having to pay anything to the IRS, you will need to pay them something each month.
Offer in Compromise
This is a tool that allows you to settle your tax debt for less than the full amount you owe. An Offer in Compromise may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. When the IRS reviews your case to determine if they are willing to accept your offer, they will take the following factors into consideration: your ability to pay, your income, your expenses, and your asset equity.
Under certain circumstances, Chapter 7 bankruptcy can completely eliminate and wipe out personal tax debts. There are a number of features, benefits, and disadvantages of bankruptcy that should be considered before setting off down that road.
If you have unfiled returns or a tax debt issue, contact us. We can help. Call us at 888-727-8796 or email firstname.lastname@example.org.