If you somehow missed all the pop-up ads, TV commercials, and people dressed up in character costumes in front of tax preparation offices, Tax Day was April 18th. Individual taxes were due then, but if the date slipped by without you noticing, you are now late on your taxes.
It’ll be OK, we promise. If, that is, you get moving now. The longer you wait to rectify the situation, the more you will owe in penalties and interest. So, let's get right to it!
You forgot to file your taxes. Here’s what to do.
Are You Expecting a Refund?
Guess what? If you have a refund due, you won't pay any penalties for filing late. You're off the hook since you don't owe money to Uncle Sam. Except you won't get that refund until you file.
Another exception is if you want to take advantage of specific tax selections, it's too late. Those need to be done by the due date. If some of those selections provided your refund, you had better check again. You may not have a refund after all.
The statute of limitations for the IRS to audit your return doesn’t start until you file. Also, if you owe state taxes, you still need to file those, or you will probably get hit with penalties and interest there.
One more thing — if you owe back taxes for other years, if you never file a return, there is no limit on how many years the IRS can go back to assess and collect tax. Any refund you expect will be applied to any back tax balance.
Failure to File Penalty
The Failure to File penalty for those who owe taxes is actually higher than the penalty for late or non-payment. The penalty is calculated as a percentage of the taxes you owe and how late you file your return. When the IRS sends you a letter or notice, you find out how much.
The Failure to File penalty is 5% of your unpaid taxes for each month or part of a month the tax return is late. The maximum amount is capped at 25% of your unpaid taxes, but it adds up quickly. Unlike the Failure to Pay penalty, the charges for Failure to File continue until you pay your taxes in full.
Finally, if your return is over 60 days late, the minimum Failure to File penalty is $435 for returns that should have been filed in 2020, 2021, or 2022 or 100% of the taxes showing on the return whichever is less.
To add insult to injury, the IRS charges interest on any penalty amounts. The date when the interest on the penalty begins varies with the type of penalty.
Failure to Pay Penalty
Since you didn’t file, you probably didn’t pay, right? At least the penalty for Failure to Pay is a fraction of the Failure to File Penalty.
Failure to Pay is 0.5% of the total tax due for each month or portion of a month you don’t pay. If you pay it all or send a payment now and then get into a payment plan with the IRS, the penalty will stop accruing.
There is a smidgen of good news here. If both the Failure to File and Failure to Pay penalties are charged for the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty, so you aren't charged more than 5% for each month the return is late.
After five months, you will max out your Failure to File penalty. However, you will owe Failure to Pay penalties until the tax balance and interest are fully paid. Failure to Pay also maxes out at 25% of the balance.
Make It Stop!
You can make the penalty for failing to file or pay stop by filing your return and paying your taxes in full, including any penalty charged to date.
Remove or Reduce Penalty
If you can’t afford that, you might be able to reduce or remove the penalty if you can prove to the IRS you acted in good faith and have reasonable cause for being unable to meet your tax obligation.
However, you will continue to accrue interest until the penalty is reduced or removed. The IRS is bound by law in this regard.
If you disagree with the amount you owe, call or write the IRS and tell the agency why it should reconsider the penalty. Sign the letter and send copies of your supporting documents if you write.
Keep the following information handy when speaking to the IRS:
- The notice or letter the IRS sent
- The penalty you want to be reduced or removed
- An explanation of why you think the IRS should remove each penalty
Apply for an Extension
If you need more time to prepare your return, you can file for an extension. Then you won’t need to file until October 17, 2022. If you make a payment along with your request, the IRS automatically grants your extension. Otherwise, the agency requires a form of security before granting an extension:
- A bond
- A notice of lien
- Other means
Unfortunately, the extension doesn't apply to the payment. You still need to pay all or part of your taxes on time. The balance accrues interest until you pay it in full.
A Note about Undisclosed Offshore Accounts
Foreign accounts not disclosed through FBAR or FATCA receive much closer scrutiny than other accounts. The fines and penalties for not reporting or paying are higher. These cases are more likely to be referred for criminal investigation and prosecution because the Federal government sees the delay in reporting as a step toward income concealment.
If you have significant balances in offshore accounts, you need to work with a tax attorney to get things straightened out immediately, if not sooner.
You Can Fix It
So, you forgot to file your taxes this year. You can fix it! File as soon as possible and make at least a good faith payment when you do, even if you are filing for an extension. You might still receive a notice from the IRS, but it will have helpful information about your tax balance, interest, and any penalties you owe.
If you need help, contact Top Tax Defenders. We have experts on staff that can get you started on the road to IRS redemption.