Tax season is underway, and millions of Americans have already filed their returns. Of course, it’s more tempting to procrastinate if you’re expecting to owe the IRS, and even more tempting when your tax situation is complicated and time-consuming. But we should all get started on our tax refunds, at the very least, so that we don’t risk running late and missing the deadline on April 17.
The late filing penalty. Yes, you can ask for an extension, and file your taxes as late as October if you need to do so. But you must file the actual extension paperwork, or else you could be charged a penalty. The failure-to-file penalty accrues at 5 percent for each month that you’re late, up to 25 percent of the amount due. This penalty applies even to those who turn out to be due a refund!
On top of that, the IRS will charge a failure-to-pay penalty of half a percent each month.
Interest on unpaid taxes. In addition to late penalties, you will also accrue interest on unpaid taxes. This interest is charged at the federal short-term interest rate, plus three percent, and will also compound daily. The IRS will continue to charge interest on your account until the balance is paid in full.
The bottom line is that late filers can be charged a late filing penalty, a along with late-payment penalty and interest on any amount due.
Luckily, you can indeed avoid part of this situation by filing for a six-month extension. But do remember that the IRS only allows you to take this action once without requiring a good reason for the tardiness. You will still owe a late-payment penalty and interest on unpaid taxes, though, so this is not a course we recommend unless you truly cannot find the time to file taxes this spring.
If you need help with any financial planning matters, please give us a call. We can answer your questions and help you make the decisions that are right for your situation.