Filing taxes tends to be a tedious task in a normal year. Since the pandemic occurred, the work of arranging paperwork to file taxes has become more stressful than usual. The unfortunate reality is that the more you delay your tax responsibilities, the heavier a burden they will become.
Numerous financial consequences are tied to chronically filing your taxes late, such as penalties and interests that pile up as they remain untouched. Professional tax relief services can best address the proper course of action in your situation should you be in a tough position with your taxes. Still, you must understand the consequences of late tax filing and payment so that you know the wisest ways to avoid issues.
Issues in Filing and Paying Taxes Late
You have two different deadlines to be aware of: first is the deadline for filing your taxes, and the other is the deadline for paying your tax debt. There are specific consequences for each.
What problems do you face if you file taxes late?
If you fail to file your taxes by the deadline, you incur a penalty worth 5% of the taxes you owe for every month (up to five months or 25% of what you owe). If you file more than 60 days past the deadline, you either pay $435 or the total amount of taxes you owe, depending on which totals into a smaller amount.
On the other hand, there are no penalties involved if you do not file your taxes when you are due a refund. However, you can also not claim the refund until you file taxes.
The longer you delay filing, the longer it takes than the usual 21 days to process your refund. Delay it for more than three years of the due date of the refund, and you risk forfeiting it entirely.
What happens if you pay your taxes late?
Paying your taxes late incurs you another set of penalties and interests. The failure-to-pay penalty is 0.5% of your tax debt, also up to five months of unpaid taxes. 25% of the taxes you owe is also the maximum penalty.
In the event that you both fail to file and pay your taxes on time, both penalties apply. However, the additional charges will be a maximum of 5%. That is, you get a 4.5% penalty for failure to file your taxes and 0.5% for failure to pay them. According to the IRS, the maximum penalty for unfiled and unpaid taxes is 47.5% of what you owe.
Filing Taxes After Years of Not Doing So
The longer you avoid fixing your tax debt, the more issues it could mean for you down the line. These are the things you should know once you decide to file your taxes again after not doing so for years.
The IRS can still collect the amount you owe
You have heard it said that avoiding a problem does not make it disappear. This applies to taxes, too. Even if you have faced no consequences for unfiled taxes from 10 years ago so far, it does not mean that the IRS has no right anymore to demand you pay your debts.
You could also get audited for any discrepancies on your record from previous years. However, the possibility of an IRS audit is generally much less of a concern than the numerous penalties and layers of interest you accumulate for failing to fulfill your tax responsibilities.
You can arrange a payment plan for unpaid taxes
Let us reiterate that late filing and payments result in steep penalties and interests. When your concern is your ability to pay everything you owe, file your taxes anyway. After that, seek the assistance of a service to help you sort out your tax issues and come to an agreement with the IRS regarding an extension or setting up a payment scheme that is reasonable for your situation.
If you are experiencing financial hardship that you can prove, the IRS can put you in currently-not-collectible status. This means that the IRS will not touch your personal assets or demand payment from you for the time being. Note that this does not get rid of your tax debt. Instead, it prevents you from incurring penalties and interest on them.
File Your Taxes Anyway
Regardless of your capacity to pay your taxes on time, you should still file them on time. Filing promptly spares you from failure-to-file penalties and gives way for you to set up an installment plan if you need more time to pay off your tax debt. So don’t forget to do so.