What Happens If You Are Late Filing Taxes?

Filing taxes by the annual deadline is an obligation for most individuals and businesses. Missing this deadline means a tax return is considered late, leading to various financial consequences. Understanding the implications of a late filing is important for taxpayers to manage their financial responsibilities effectively. The Internal Revenue Service (IRS) imposes specific measures when tax returns or payments are not submitted on time.

Understanding Penalties and Interest

When a tax return is filed late, two distinct penalties may apply: the Failure to File Penalty and the Failure to Pay Penalty. These penalties are designed to encourage timely compliance with tax obligations. Both can be assessed simultaneously, increasing the overall cost to the taxpayer.

The Failure to File Penalty is more substantial than the Failure to Pay Penalty. It is 5% of the unpaid taxes for each month or part of a month that a tax return is late, with a maximum accumulation of 25% of the unpaid taxes. If both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty for that month.

The Failure to Pay Penalty is assessed when taxes are not paid by the due date. This penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, with a maximum charge of 25% of the unpaid taxes. If a taxpayer has an approved payment plan, the failure to pay penalty for individuals is reduced to 0.25% per month or partial month.

Interest also accrues on underpaid taxes and any penalties from the original due date until payment. The interest rate is determined quarterly and is based on the federal short-term rate plus 3 percentage points, compounded daily. This interest applies to both unpaid tax balances and any penalties assessed.

Steps to Take When Filing Late

If your tax return is late, immediate action is important to reduce potential penalties and interest. The primary step is to file your tax return as soon as possible, even if you cannot pay the full amount of tax owed. Filing your return stops the Failure to File Penalty from accumulating, which is generally higher than the Failure to Pay Penalty.

After filing, pay as much of your tax liability as you can afford. Paying any portion of the tax due will help minimize the Failure to Pay Penalty and the interest that accrues on the unpaid balance.

Late returns can be filed electronically if tax software supports prior years, or they can be mailed as a paper return. If you have received an IRS notice, it is advisable to send your past due return to the location indicated on that notice. For payments, electronic options include IRS Direct Pay, which allows payments directly from a checking or savings account, or the Electronic Federal Tax Payment System (EFTPS). Payments can also be made by check or money order, ensuring the payment includes your name, address, Social Security number, tax year, and return type.

Special Circumstances and IRS Options

Different scenarios can affect the consequences of late filing and payment, and the IRS offers various relief options. If a refund is due, there is typically no Failure to File Penalty, as this penalty is based on unpaid tax. To claim a refund, you generally must file your return within three years from the original due date.

If you filed an extension to file your return, it is important to remember that this extends the time to file, not the time to pay. An extension, such as Form 4868, provides an automatic six-month extension to file, but any tax owed is still due by the original deadline. If you paid at least 90% of your tax by the original due date and file by the extended deadline, you may avoid the Failure to Pay Penalty, though interest still applies to any unpaid balance from the original due date.

For taxpayers who cannot pay their full tax liability, the IRS provides several payment options. A Short-Term Payment Plan is available for up to 180 days, allowing additional time to pay in full without an application fee, though interest and penalties continue to accrue. For longer repayment periods, an Installment Agreement allows monthly payments for up to 72 months (six years). To qualify, individuals generally must owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns.

An Offer in Compromise (OIC) is another option, allowing certain taxpayers to settle their tax debt for a lower amount than what is owed. This is considered when there is doubt about the IRS’s ability to collect the full amount due to financial hardship. Approval for an OIC is not automatic and depends on factors like income, expenses, and asset value.

Taxpayers may also request penalty abatement if they have “reasonable cause” for filing or paying late. Reasonable cause is determined on a case-by-case basis, considering all facts and circumstances. Examples of reasonable cause include natural disasters, serious illness, unavoidable absence of the taxpayer or an immediate family member, or inability to obtain records. Factors like reliance on a tax professional or lack of knowledge of tax law generally do not qualify as reasonable cause. Even if penalties are abated, interest still applies to the outstanding tax liability.