Failure to file taxes in the US can result in a variety of penalties imposed by the IRS. A penalty is designed to encourage taxpayers to timely file their tax returns and ensure compliance with tax laws. It serves as a deterrent for taxpayers who might otherwise neglect their tax obligations.
Failure-to-File penalty: This is the penalty for not filing or late-filing. It affects those who don’t turn in their Form 1040 and other important tax documents on time. It is usually 5% of the tax owed for each month (or part of a month). The maximum is 25%. If your tax return results in a refund, then there are no penalties for failure to file.
Failure-to-Pay penalty: If you do not pay by the due date, you may be charged a failure-to-pay penalty. This is 0.5% of the tax owed for each month (or part of a month) that the payment is late, plus interest. The maximum failure-to-file penalty is 25% of the total tax.
The IRS calculates penalties automatically and add them to any tax owed. The IRS will send you a notice detailing the amount and the reason for it. If you disagree with the penalty, file a protest with the IRS or seek the assistance of a tax professional.
How to avoid a failure-to-file penalty
If you know you are going to miss the deadline, request an automatic six-month extension. Do this by mailing Form 4868 to the IRS. Remember though, a tax extension only gets you more time to file your return, not more time to pay.
Some people, such as members of the military, overseas citizens, and natural disaster victims, may get automatic extension. If you miss the tax extension deadline as well, the late-filing penalty could come back to haunt you.
You may also consider the penalty abatement option. This is the process of removing penalties for taxpayers who made a mistake in filing or faced unfavorable circumstances.
What if the IRS owes you a refund?
If you have to get a tax refund, the IRS won’t charge anything for late filing. To claim your refund, you must file your tax return within three years, or you could forfeit your refund.
As penalties and interest on unpaid taxes are considerably high, it is better to not ignore your tax filing obligations. If you owe taxes but don’t know how to process your returns, consult a CPA or tax consultant. They can help you file your due returns, set up a reasonable payment plan and request abatement.