It can happen to anyone. Maybe you’ve been buried by a big project at work, dealing with a family crisis or illness, or just so overwhelmed by the task of gathering all your tax documents and receipts that the April 15 tax deadline came and went.
You didn’t file your tax return. You didn’t even request an extension. Now, you don’t know what to do.
First, don’t panic. IRS Special Agents won’t be storming your home. But it is essential to get in compliance as soon as possible. Here is some advice for doing just that, whether you’re owed a refund or you owe tax to the IRS.
If You’re Due a Tax Refund
If you are owed a refund from the IRS, there is no penalty for filing your return late. But that doesn’t mean you should take your time.
You have three years from the return due date to claim a tax refund due to tax withheld, estimated taxes paid, or refundable credits. That means that for 2017 returns, the window closes on April 15, 2021. After three years, unclaimed refunds become the property of the U.S. Treasury.
Think you’d never procrastinate on your tax filing obligations for so long? Over a million people do every year. Each year, the IRS makes a media push to get delinquent filers in compliance by announcing the billions of dollars in unclaimed refunds taxpayers are about to forfeit. In July 2020, the agency had income tax refunds totaling almost $1.5 billion waiting for an estimated 1.4 million taxpayers who did not file a 2016 Form 1040. The IRS estimated the median refund to be around $861.
While that deadline might seem like a long way off now, the tax filing deadline will be here in no time. It’s a good idea to get any delinquent tax returns squared away now before your tax filing obligations start piling up. Start filing your taxes today using tax software from H&R Block and claim the refund you’re owed.
If You Owe Tax
If you’re not one of the lucky taxpayers expecting a refund, it’s even more crucial to file your tax return as soon as possible. Every day that your return is delinquent, the IRS charges penalties and interest on the balance due. There are three types of penalties you might have to pay.
1. Failure to File Penalty
When you don’t file your federal tax return by the due date, the IRS charges a failure to file penalty. The penalty is 5% of the unpaid tax, but it’s reduced by the amount of the failure to pay penalty for any month where both penalties apply (more on the failure to pay penalty below). The failure to pay penalty applies for each full month or part of a month that your return is late for up to five months. If your return is less than 30 days late, you’ll still be charged a full month’s penalty.
The IRS also has minimum late filing penalties when returns are filed more than 60 days after the due date. The minimum penalty is the lesser of:
- 100% of the tax you’re required to report on the return that you didn’t pay on time
- A specific dollar amount that’s adjusted annually for inflation (for returns due after Dec. 31, 2019, the minimum penalty is the smaller of $435 or 100% of the tax required to be shown on your return)
2. Failure to Pay Penalty
When you don’t pay the taxes reported on your return in full by the April 15 due date, the IRS charges a failure to pay penalty. The penalty is 0.5% of the tax not paid by the due date. This late payment penalty applies every month or part of a month that your payment is late until your tax bill is paid in full or until the penalty reaches 25% of the tax owed.
For example, say you filed your 2018 return that was due on April 15, 2019 on May 30, 2019, and your return had a balance due of $500, which you paid on the same date. The IRS would charge both failure to file and failure to pay penalties for two months (April and May). The penalties would be calculated as follows:
|Failure to File Penalty||5% of $500 x 2 months||$50.00|
|Failure to Pay Penalty||0.5% of $500 x 2 months||$5.00|
|Reduction for 2 Months Where Both Penalties Apply||– $5.00|
3. Failure to Pay Proper Estimated Tax
If you were required to make estimated tax payments and either didn’t make them or paid less than you should have, the IRS may also charge an estimated tax penalty. Estimated tax payments are generally required if you expect to owe at least $1,000 after subtracting withholding and refundable credits. The estimated tax penalty is calculated separately for each required installment using Form 2210.
In addition to the penalties listed above, the IRS can charge interest on the amount due and on the late-filing penalty. The interest rate is the federal short-term rate plus 3%. This rate is set every three months; for the first quarter of 2021, it’s 5.2%. Interest compounds daily.
In some circumstances, the IRS will waive the estimated tax penalty on a first offense. To qualify for First Time Penalty Abatement, you must meet the following three criteria:
- You weren’t required to file a tax return or had no penalties for the last three tax years
- You filed all currently required tax returns or filed an extension of time to file
- You paid, or arranged to pay, any tax due
Typically, the IRS will not waive interest on a past-due payment, but any interest charged on a late-filing penalty will be removed if the penalty is waived.
Some taxpayers mistakenly avoid filing their tax return because they can’t pay the tax they owe with it, but penalties and interest accrue starting on the date the return is due, no matter when you file. For that reason, it’s a good idea to file your return, pay as much as you can, and look into payment options for the balance.
How to File a Late Tax Return
The reasons for missing a tax filing deadline are as varied as taxpayers themselves, but here are a few common reasons why you may be late in filing your return, as well as tips for working through them.
If You Can’t Afford a Tax Professional
For all but the simplest tax returns, filling out tax forms by hand is a nightmare. You have to navigate confusing instructions, and you run the risk of entering information on the wrong line or making a calculation error.
Hiring a tax professional can be expensive, and online tax preparation software usually comes with a fee. Fortunately, a number of free online tax software programs are available. One of the most well-known is H&R Block. They have their own rules and restrictions as to who qualifies for free filing, so check out this list of free online tax preparation software and services to find the right one for you.
If You Can’t Find Your W-2 or Other Tax Forms
Did you lose your W-2s and other tax documents, perhaps during a move, flood, or fire? If so, you can get details for all of the income and deductions reported to the IRS by ordering a Wage and Income Transcript. This transcript includes data from informational returns the IRS receives on your behalf, such as W-2s, 1099s, and 1098s. This information is available for up to 10 years.
If you’re missing information on estimated tax payments you made, you can get this information by requesting a Tax Account Transcript, which includes all payments applied to your account, including estimated payments, withholding, and overpayments from prior years’ returns.
Unfortunately, these transcripts may not include all available deductions you would normally claim on your return. After all, the IRS only has the income and deductions reported to it. The agency doesn’t know how much you donated to charity last year or whether you had significant out-of-pocket medical expenses. You might need to ask the nonprofit organizations you donated to for a duplicate receipt or get your account history from your doctor’s office for those. However, these transcripts are a good start toward recreating your tax documentation.
If You Owe More Than You Can Pay
It bears repeating: Avoiding filing a tax return because you can’t afford to pay the tax due is not a smart move. It will only result in you owing failure to file penalties on top of the other penalties and interest. File as soon as possible, pay as much as you can with your return, and then look into options for dealing with your tax debt, such as paying with credit cards or applying for an installment plan.
Delinquent tax returns can have a variety of consequences. An unclaimed tax refund is essentially an interest-free loan or gift to the IRS. Penalties and interest can take more money than necessary out of your pocket, and an IRS collections action can result in your bank account or wages being levied. It may also hinder your ability to get a mortgage, business loan, or federal financial aid.
Nobody likes dealing with tax filings and sending their hard-earned money to the IRS, but the law requires you to file a return every year that you have a filing requirement. So file your tax return and get back into good standing with the IRS. When it comes to taxes, it’s always best to address problems sooner rather than later.