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As mid-April approaches, many taxpayers realize that they're going to have a tough time getting their tax returns prepared by the official deadline. Before you decide to go ahead and be late with your tax filing, however, there are some things you ought to know about the consequences. Fortunately, as you'll see below, you have some alternatives to late filing that save you from a costly mistake.
What are the penalties for filing late?
The IRS doesn't like it when taxpayers file their returns late, and the penalties that it imposes on late filers makes it clear that it's serious about enforcing its deadlines. For every month or portion of a month that your return is late, the IRS charges a penalty equal to 5% of your outstanding taxes owed. The maximum late-filing penalty is 25% of your unpaid taxes, which you'll hit after four months and a day. However, the IRS imposes a minimum penalty of $205 if you're more than 60 days late in filing, even if the percentage of your tax liability would otherwise result in a smaller amount.
There are a couple of situations in which you don't have to worry about the penalty. The most obvious one is when you're owed a refund. Because the penalty is calculated as a percentage of your taxes due, those who don't owe any taxes don't face a penalty. However, by not filing a return, you'll delay your refund unnecessarily.
You can also avoid a penalty if you can show reasonable cause for not filing on time. Every year, many taxpayers in certain areas qualify for additional time to file due to natural disasters or other extraordinary circumstances. Reasonable cause is a relatively high standard, but it's worth trying if you end up owing the penalty.
The easy way to avoid late filing penalties
Getting hit with a late-filing penalty in April is one of the silliest things you can allow to happen. That's because taxpayers are automatically entitled to a six-month extension of time to file. All they have to do to get it is to request it by filing a simple one-page form. That will give you until mid-October to get your returns done.
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If you elect to get an extension, you're not excused from paying your tax bill on time. However, the penalty for late payment is far smaller than the penalty for late filing. Those who don't pay their taxes by the deadline incur a penalty of one-half of one percent for each month or portion of a month that they're late. That's just a tenth of the penalty for late filing, showing exactly how much the IRS wants to encourage people to file even if they can't pay by the filing deadline.
Finally, many people think that they're better off not filing a return at all because they mistakenly believe that they can fly under the IRS radar by not having documentation on file. Before you make that mistake, remember that even if you don't file anything with the IRS, your employer and any financial institutions that pay you interest, dividends, or other investment income send in information returns that go into the IRS computers. Tied to your Social Security number, these returns alert the IRS that it should expect a tax return from you by the April deadline. If you don't do what you're supposed to do, the IRS will know about it -- and it won't hesitate to reach out and let you know.
If you're feeling stressed out about getting your taxes done on time, the smart thing to do as the filing deadline approaches is to look at what you need to do to get an automatic extension. It's not worth it to pay draconian late-filing penalties when there's no reason at all to do so.
The article Thinking About Filing Your Taxes Late? Here's What You Need to Know originally appeared on Fool.com.
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