Life is hectic. We’re all busy people. With that in mind, there are certain things that most people will schedule their busy lives around. Even if we forget a loved one’s birthday, or an anniversary, there’s one deadline we ALL know about: April 15th.
So what happens if, in all the hustle and bustle, we forgot to file our tax returns on time? This article will attempt to outline the basics that would apply to most taxpayers. However, in the spirit of most disclaimers, this is not an all-encompassing article. It might not address your specific situation.
For example, there are many exceptions and special rules for military personnel. Fortunately, the IRS’ website does a pretty good job outlining the rules for people who might have special circumstances. For the rest of us working stiffs, this article will try to translate the IRS’ ‘tax-speak’ into normal, everyday English.
When exactly IS the tax return filing deadline?
April 15th, traditionally known as tax day, is the deadline for filing taxes on individual tax returns. However, for those of you who might be off by a day or two, there are a couple of rules that might help you out.
First, in years where April 15th falls on a weekend or holiday, the tax filing deadline is pushed to the next business day. Holiday? Yep, holiday. In 2018, the tax filing deadline fell back to Tuesday, April 17th, because Monday was Emancipation Day, which is a legal holiday in the District of Columbia. Under the tax law, legal holidays in DC affect the nation’s filing deadline.
However, it’s not just Emancipation Day. In Maine and Massachusetts, as well as an increasing number of states, Patriots’ Day (not to be confused with Patriot Day, which is September 11th) sometimes interferes with Tax Day. In 2019, the filing deadline in both states was actually Wednesday, April 17th. Since Monday was Patriots’ Day, and April 16th was Emancipation Day in DC, Maine and Massachusetts residents had until April 17th to file their tax returns. I’m from Florida, but I guess I’d be a Patriots fan if I lived in either of those two states, too.
Okay, I missed the tax deadline for real. Now what?
Let’s imagine that you fall into one of two groups of people. Either you (or your tax preparer) filed for an extension. Or you did not. Let’s tackle the first one first:
My tax preparer filed for an extension. What happens now?
If you have an extension filed, in most cases, this gives you until October 15th to file your taxes. You’ll avoid the failure to file penalty (more on that in a bit). However, if you end up owing taxes, you’ll pay a penalty on the outstanding taxes, and interest.
A good accountant would probably have estimated your tax liability, either from prior tax returns or from what they might know about your tax history. If they thought you might owe money, they probably would have you send a check in before the filing deadline. Of course, if you’re the kind of person who dumps a shoebox of receipts on their desk, or if you just got a bunch of stuff into them on April 14th, they might not have done so.
As long as you don’t owe money and you’re on extension, you’re good until October. That gives people with complicated tax returns more time to get their documents lined up. If you do end up owing money, then you’re still on the hook for failure to pay penalties, and interest (more below).
I didn’t get an extension. What does this mean for me?
If you didn’t get an extension, there are a couple of penalties that might apply. I’ve outlined them below:
Failure to file penalty (Internal Revenue Code §6651(a)(1)). The failure to file penalty:
Is charged for each month (or partial month) that your return is late, up to 5 months
Is 5% of the unpaid tax of the tax due for each month (or partial month) that your return is late, up to 5 months (or 25%).
Is not charged if a late tax return results in a tax refund.
Is partially offset by the failure to pay penalty (see below) in any month where both penalties apply.
Failure to pay penalty (for taxes reported on tax return) (Internal Revenue Code §6651(a)(2)). The failure to pay penalty
Is charged for each month (or partial month) after the original tax filing deadline (April 15th in most years) that your unpaid tax remains unpaid.
Is 0.5% of any unpaid tax for each month (or partial month) that it remains unpaid, with a maximum total penalty of 25% of the unpaid tax.
Failure to pay penalty (for taxes not reported on tax return) (Internal Revenue Code §6651(a)(3)).
Is charged for each month (or partial month) after the due date in a notice
Due dates in a notice are usually 21 days from the date of notice, or 10 business days if the balance equals or exceeds $100,000 in taxes due.
Is 0.5% of any unpaid tax for each month (or partial month) that it remains unpaid
Partially offsets the failure to file penalty for any month in which both penalties apply. In other words, the maximum monthly charge for both penalties is 5%, not 5.5%.
Maximum total penalty for failure to file and failure to pay is 25% of the unpaid tax.
Failure to pay proper estimated tax (Internal Revenue Code §6654.
This is a separate penalty that is calculated in your tax return (Line 23). Since employers are required to withhold estimated taxes from their workers’ paychecks, most people don’t usually worry about this. However, this is something that is becoming more and more important for a lot of people, particularly:
Small business owners
Independent contractors (also known as 1099 employees, since their employer usually issues a Form 1099-MISC instead of a W-2)
People with significant rental income
People who experience significant changes in their income, such as recent retirees, or those who might have a lot of capital gains in one year
Odds are, if you’re strictly a W-2 employee with virtually all of your income from your paycheck, you’re probably not paying attention to this. But everyone should. This penalty applies to anyone who expects to:
To owe at least $1,000 on their tax return
Did not pay at least the lesser of:
90% of their estimated current year’s tax (66 2/3% for fishermen)
100% of their previous year’s tax
The reason why everyone should pay attention to this penalty is because many people screw up their withholdings throughout the year. And it has nothing to do with the employer---they literally are following instructions given by their employees (which is what you do when you fill out a Form W-4 for your employer) and the IRS (who prescribes withholding guidance in Publication 15, Employer’s Tax Guide—also known as Circular E).
After the passing of the Tax Cuts and Jobs Act, the IRS made a serious miscalculation to Publication 15, which forced employers to withhold much less than they should have. Fortunately, the IRS provided penalty relief by lowering the estimated tax threshold from 90% to 80%.
The IRS does provide several free resources, like a withholding calculator, to help people decide if they need to increase their withholdings.
What about interest?
If you owe penalties, the IRS will impose interest as well. Generally speaking, interest accrues on any unpaid taxes and penalties at a predetermined interest rate. This interest rate is determined quarterly, and is usually the federal short-term rate plus 3 percent. There is a quarterly news release that outlines the latest interest rates in the IRS Newsroom.
Of course, interest also accrues on money the IRS owes you as well. For individual taxpayers, you get the same rate-federal short-term plus 3 percent. However, this only applies:
When you’ve filed a complete and signed tax return
If the IRS has exceeded their allotted administrative lead time (usually 45 days) to process your return. In other words, if the IRS can process your return and provide your refund within this timeframe, you won’t get interest.
If the IRS does pay interest, it will start to accrue on the later of:
Return due date
Late filed return date
Date payment was made
By the way, this interest income is still taxable, even if it’s from the IRS.
Hopefully, you won’t have to put any of the guidance in this article to use. If you do have a problem with late tax returns, then you should at least hire a professional, engage in tax planning, and pay a reasonable amount of estimated taxes to minimize penalties and interest.
If you feel you can use guidance with your finances, some great ideas to improve your financial life, and a partner who wants to help you succeed, come visit us at Lawrence Financial Planning. We can help you incorporate tax planning into your overall financial picture and we are more than happy to help you determine if working with a tax-focused, fee-only financial planner is right for you.