So the tax deadline came and went and you missed it. What happens now?
What steps can you take to correct this and get back on track? There are some vital actions you need to take to properly handle this situation.
But before taking steps to file your late tax return, you first need to understand the types of penalties and implications associated with this.
Will You Have to Pay Fees?
Yes, unfortunately, if you’re filing your tax return past the April 15th deadline, you will likely be assessed a few different types of fees.
Filing late. As mentioned, whether you plan to owe money or expect a refund, you’ll likely have to pay a failure-to-file penalty. There is one loophole for this though. If you can prove to the IRS there was a valid reason for paying late (aka specific circumstances like health issues, emergencies, etc). The penalty amount is usually 5% for each month (or part of a month) that your tax return is late and is capped at a 25% maximum.
Paying taxes late. If you estimate that you’ll owe a balance on your tax return, your account will be charged 0.5% on the amount of unpaid taxes due every month they are outstanding. This fee will decrease if you filed your return on time but failed to pay your entire balance owed.
Underpaying. If you aren’t able to cover your entire tax bill, an underpayment fee could be assessed to your account. This fee varies at different levels depending on what category your actions fall into. If the IRS classifies this as fraud or negligence the fees could be quite high.
To recap the fees for filing late:
- Failure-to-file penalty: (FTF) fee of 5% per month up to a 25% max
- Failure-to-pay penalty: (FTP) fee of 0.5% per month up to a 25% max
- Underpayment penalty: varies depending on the category of account
For more information on avoiding tax fees and other penalties, check out the IRS website.
Now that you understand the importance of taking action right away, in order to avoid crazy fines and penalties, here are five vital steps to take.
1. Don’t Panic
The very first step to take if you missed the tax filing deadline is to not panic. You don’t want to keep ignoring the situation but you also don’t want to make hasty decisions that could make matters worse.
Gather all your income documents and print out all your expense statements for the year. Don’t forget any retirement, investing accounts and other reports to prove your income and expenses. Once you’ve gotten all your important papers together, you can move (calmly) onto the next steps.
2. E-File Right Away
The sooner you file your taxes, the lower amount of penalties and interest you’ll have to pay. This is especially important if you expect to owe a balance. The quickest way to file your return is through e-filing which is available for free (from taxpayers who qualify) from the IRS website, or doing a quick online search for other services that offer e-filing.
The reason e-filing is the best option is that you can file your return and have it processed within 24 hours. Mailing in a paper return could take 4-6 weeks and during that time your account will continue accumulating penalties and other fees.
Or… 3. File an Extension
If you need more time to file your taxes, and can’t e-file today, then you need to file a tax extension. Everyone is automatically eligible for this and it will give you until October 15th of this year to get your taxes filed. You’ll still be required to pay any balance due, but you could end up avoiding any additional fines or penalties.
This should give you enough time to get your accounts in order and determine the right action going forward for your tax situation.
4. Pay What You Can
If you find out that you owe a large amount of taxes, try to pay as much as possible. This will decrease the balance owed and help keep your penalties charges to a minimum. Then for any remaining balance, you can apply for an installment agreement. If approved, this process will completely eliminate you from having to pay excess fees and interest charges.
In some cases, it’s often a better option to take out a small personal loan or pay your tax balance with a credit card, than to owe the IRS money. You could save a lot of money (and headache) versus the high interest rates and fees that the IRS charges.
5. Make a Plan for Next Time
Tax season is one of those (unfortunate) events that pop up year after year. So your last step is to avoid any mishaps in the future. Sometimes life deals us a bad hand and there’s not much we can do. But it’s best to plan for any issues going forward, so you aren’t caught off guard again.
Work with a bookkeeper throughout the year, or hire a CPA, to help you manage your money more closely this year. Even if you had to pay someone a couple hundred dollars, it will be well worth not owing the IRS thousands of dollars next year.
Plus, you’ll be less stressed knowing that you have a good plan in place, which will save you time and give you peace of mind. Those benefits are priceless.
A balance owed to the IRS could result in large fines and put a ding on your credit report. So if you missed the tax deadline, be sure to follow these steps to hopefully avoid most of these consequences.