Why Might You Want to File Your Tax Return On Time Anyway?

Tax deadlines are a fundamental part of the U.S. tax system, typically falling on April 15th for most individuals. While some taxpayers might consider delaying their tax return submission, especially if they anticipate owing money or facing other complications, there are compelling reasons to adhere to the filing deadline. Filing your return on time offers benefits that extend beyond simply meeting a requirement, regardless of your ability to pay or the perceived complexity of your tax situation.

Avoiding Penalties and Interest

Timely filing helps taxpayers avoid significant financial repercussions, primarily through penalties and interest. The Internal Revenue Service (IRS) imposes a “failure to file” penalty of 5% of unpaid taxes for each month or part of a month your return is late, capped at 25%.

In contrast, the “failure to pay” penalty applies if you file on time but do not pay the tax owed by the due date. This penalty is 0.5% of unpaid taxes per month, capped at 25%. If both penalties apply, the combined penalty is 5% (4.5% failure-to-file, 0.5% failure-to-pay). The failure-to-file penalty is substantially higher, making it financially beneficial to file your return even if you cannot pay the full amount due.

Interest also accrues on unpaid taxes from the original due date. The interest rate for underpayments is the federal short-term rate plus three percentage points, which the IRS determines quarterly. Filing on time, even when unable to pay, can mitigate or eliminate the failure-to-file penalty and reduce the accumulation of interest.

Claiming Your Refunds and Credits

For many taxpayers, filing a tax return is the only way to receive a refund of overpaid taxes or claim valuable tax credits. Tax credits directly reduce the amount of tax you owe, and some, like the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC), can be refundable, meaning you might receive money back even if you owe no tax. The EITC is a refundable credit for low- to moderate-income workers, based on earned income, investment limits, and family size. The CTC can be worth up to $2,000 per qualifying child, with a refundable portion (Additional Child Tax Credit) up to $1,700 per child.

A deadline exists to claim a refund: you must file your return and claim the refund within three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Failing to file within this period means forfeiting any money owed to you. If you are due a refund, filing on time helps ensure you receive your money without unnecessary delays.

Establishing Your Financial Record

A timely filed tax return serves as an official document of your income and financial history, which is often required for various financial endeavors. For instance, when applying for loans such as mortgages, student loans, or business loans, lenders frequently request tax transcripts to verify your income and financial standing. These transcripts summarize your tax return information and are accessed by lenders with your consent.

Having a consistent record of timely filed tax returns can also protect against identity theft. Filing your return promptly establishes your legitimate financial information with the tax authority, making it more difficult for a fraudulent return to be filed in your name as the IRS system flags duplicate filings using your Social Security number. Filing early effectively preempts potential fraudsters from claiming a refund using your stolen identity.

Proactive Resolution of Tax Matters

Even if you know you owe taxes and cannot pay the full amount by the deadline, filing your return on time opens avenues for proactive communication and resolution with the tax authority. Ignoring the filing deadline only compounds the problem, potentially leading to higher penalties and limiting your options.

The IRS offers various payment options for taxpayers facing financial difficulties. These include short-term payment plans, allowing up to 180 days to pay the balance in full, or long-term installment agreements for monthly payments over an extended period. To qualify for an installment agreement, individuals need to owe $50,000 or less in combined tax, penalties, and interest and must have filed all required returns. Another option is an Offer in Compromise (OIC), which allows certain taxpayers to settle their tax debt for a lower amount than what is owed if they can demonstrate an inability to pay the full liability. However, to be considered for an OIC, all required tax returns must be filed and all estimated tax payments made.