Broke? Do you need an extension? Change return? Regardless of your situation, you will need to file your taxes
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The IRS may extend the deadline for filing your 2020 annual taxes to May 17, but there’s no time like now to get started – regardless of your circumstances.
Perhaps you owe money that you do not currently have. Perhaps your life has been turned upside down and paying taxes is the last thing you want to do. But don’t even think about not filing a tax return.
“It’s a terrible idea,” said Nayo Carter-Gray, founder of 1st Step Accounting, not to file any documents. “It’s one of the worst things you can do.”
Lisa Greene-Lewis, Tax Expert at TurboTax, agrees.
“It’s definitely a bad idea,” she said. “Submit the return even if you can’t pay what you owe.”
Let’s start with the penalties. Failure to file your tax return will result in a penalty of 5% of the monthly tax due up to a maximum of 25% of the unpaid amount.
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So if you don’t file and owe $ 10,000, there will be fines of $ 500 per month, up to a total of $ 2,500. If you file your tax return but fail to pay the taxes owed, the penalty is only 0.5% of the monthly balance.
The IRS also charges interest on past due taxes equal to the federal short-term interest rate plus 3%. This rate is currently 3% and is reviewed every three months.
Interest will accrue from the new registration deadline on May 17th until you pay the tax owed. (The deadline for paying quarterly taxes remains April 15th.)
If you are unable to submit the return on time, one solution is to apply for an extension using the IRS Form 4868. You have an additional five months – until October 15th – to put the return together. Businesses requesting renewal use Form 7004 even though the registration deadline for sole proprietorship, partnerships, and other end-to-end businesses was March 15th. However, the IRS expects you to pay your estimated taxes along with the renewal.
“A lot of people think that renewing gives you extra time to pay taxes you might owe,” Greene-Lewis said. “It doesn’t.”
In other words, if you fail to pay your estimated taxes due when requesting an extension, you will remain liable for the 0.5% monthly penalty as well as the current 3% monthly interest that will be charged on the balance due.
Failure to file a tax return and / or pay any taxes due also has ramifications beyond the direct fines. Every year the IRS reports unclaimed tax refunds in excess of $ 1 billion. Much of this is due to people failing to provide feedback because they are below the income threshold for mandatory registration.
That threshold is currently $ 12,400 for individuals and $ 24,800 for married couples filing together. Many of these people are eligible for refundable credits, Greene-Lewis said, and may never know unless they file a return. Taxpayers have up to three years to request refunds.
Also, given the plethora of tax breaks in the three coronavirus aid packages over the past year, people can miss out on valuable government benefits and payments if they fail to file claims.
For example, if you didn’t receive the full stimulus payments that you were eligible for last year, you can get a refund – but only if you file a tax return. “There have been a lot of changes in tax law over the past year that affect people,” Greene-Lewis said. “When you submit a return, you know where you stand.”
For people in financial trouble, ignoring your tax liabilities will make things much worse, Carter-Gray said. The IRS may use information about your income to file a “return replacement” to assess a tax liability for you. To say the least, the agency isn’t going to give you all of the deductions and credits you may be eligible for.
If you’re facing personal bankruptcy, not filing a return will complicate matters. “You have to file a tax return to put tax debt in the pot for bankruptcy purposes,” said Carter-Gray.
Taxpayers unable to pay the taxes they owe can negotiate a payment schedule with the IRS, but only if they file a tax return or at least an extension. Carter-Gray has worked with people who haven’t filed returns in many years – and says it’s ugly.
“The IRS can place liens on your property and garnish your wages,” she said. “Go into compliance because you really don’t want to.”