As we approach the final individual tax filing deadline for the year, we’ve been receiving questions about the implications of filing tax returns after the deadlines. Here is some information about the implications of late filings and payments, and some advice for minimizing the impact of penalties.

The IRS Knows More Than You Think

Will you get caught? Most likely. If you have income from third party sources, the IRS will eventually send you a notice that you owe taxes and possibly some penalties. The IRS will prepare a substitute tax return, but since they won’t factor in exemptions or deductions like an accountant it may be much more than you actually owe.

There are three specific penalties for late filed returns:

  • Failure to file – typically about 5% of the taxes due for each month the return is late, and a minimum of $135 if you are more than 60 days late
  • Failure to pay – typically 0.5% (1/2 percent) of the taxes due for each month that no payment is received.
  • Interest – Interest is also charged on tax balances due, either from failure to pay or underpayment. The interest rate is currently set at 3% annually.

The penalties are based on taxes due, not income, but they can still add large amounts to your IRS balance. The payment penalty is subtracted from the filing penalty (except for the $135 minimum).

If you still don’t respond after initial notification, the IRS will begin a collection process that includes tactics such removing money from your paycheck or bank accounts, placing a lien on your property, or taking your assets. After three years you could lose any refunds due.

Tips for Minimizing the Impact of Late Tax Returns and Payments

Rather than waiting for the IRS to take action, your best bet is to be proactive with your tax filing and payment efforts:

  • File your own tax forms as soon as possible – claim the exemptions, deductions, and credits you are owed, and show the IRS that you are making an effort to comply.
  • Pay as much as you can – this minimizes interest and penalties, and may help you qualify for a variety of settlement options such as extensions, installment plans, or hardship considerations.
  • Contact the IRS – you can do this on your own, but consider working with a tax professional, like a CPA, who is familiar with the IRS and potential settlement options.

The goal of the IRS is to collect the tax money that you owe, not send you to jail. As long as you make an honest effort to file and pay, you will find the IRS to be fairly flexible in their willingness to work with you.

Faye Sklar