If you owe the government money or aren’t good with numbers, the thought of filing your taxes may make you woozy. But the IRS has two words for you: Don’t panic.
The federal tax collection agency is actually very flexible when it comes to arranging for a six-month filing extension or making payment arrangements.
But what happens if you file your taxes late or after an agreed upon extension? What if you don’t pay on time or make other arrangements for payment?
The simple answer: Penalties and interest start accumulating.
And if the IRS has to figure your taxes for you from other sources such as your banks and employer, you might not get your deductions and exemptions.
Playing catch up
Gary Anspach has seen his share of multi-year filers trying to play catch up. “People are paralyzed by the process and don’t know how to do it, so they don’t,” says the California enrolled agent licensed by the IRS to represent clients.
“The problem is that it sometimes results in enormous tax liabilities. You cannot understand the magnitude of it unless you see it.”
Some of his clients are giving the government up to an extra 50 percent of their tax liability just for being late, he says.
$450 billion owed
On a larger scale, the amount of unpaid taxes cited in a 2012 IRS report, $450 billion, was more than the budget deficit at the time of its study, the agency reported last month, according to the Associated Press.
So here are the IRS basics for lax filers and payers:
- The penalty for not filing is worse than the penalty for not paying.
- Failure to file timely carries a fine of 5 percent a month of the balance due, up to a maximum of 25 percent. If your return is more than 60 days late, the minimum penalty is $135 or 100 percent, whichever is smaller, the IRS says.
- Failure to pay will cost you one-half of 1 percent of the tax owed per month until the taxes are paid, up to 25 percent.
- Plus, you also have to pay interest on unpaid balances, which has been 3 to 4 percent lately, Anspach says.
- If you can’t pay the full amount, the IRS recommends paying as much as you can by the deadline to reduce your penalties and interest.
The IRS recognizes that many people have difficult financial situations. “There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund,” the agency states on its website.
That’s why there are provisions such as tax credits for eligible taxpayers. They can request a payment or installment agreement, a short-term extension to pay or try to reach a compromise with the IRS.
Must show reasonable cause
“You can ask for a penalty abatement, but the criteria is narrowly interpreted by the IRS," Anspach says. "You have to show reasonable cause. You can’t say you got sick because you had since February to file. It has to be a reason sufficiently serious to have kept you from filing for an extended period of time.”
Typically, the IRS delays legal action in favor of voluntary compliance.
“A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file or make arrangements to file, before being notified they are under criminal investigation,” the IRS says on its website. “The taxpayer must make an honest effort to file a correct return and have income from legal sources.”
If taxes are not paid and no effort made to pay them, the taxpayer may be asked to sell or mortgage assets or take out a loan. More serious enforcement could include levying bank accounts, wages or other income or taking other assets, the IRS states. It could affect your credit standing.
The penalties also increase after the IRS issues a notice of intent to levy, the agency says.
If you’re self-employed and don’t file a return you will not receive credits toward social security retirement or disability benefits, the IRS adds.
Realizing the consequences
“The biggest problem is people don’t realize the consequences of not filing,” says Cindy Hockenberry, Tax Knowledge Center supervisor for the National Association of Tax Professionals. Taxpayers think they’ve moved around so much or paid cash for everything, the government won’t find them. There’s a definite lag time and the IRS only audits a small percent of taxpayers, she admits.
“It may take several years, but the IRS will eventually catch up to you. They are getting clever and a lot more diligent with under-reporting and non-filers. It’s not in anyone’s best interest to try to outfox the IRS.”
Hockenberry is amazed that even those due a refund are surprisingly lax in filing. “It’s mind-boggling. People don’t want to file even if it’s a favorable result.”
Three years to claim refund
Taxpayers have three years from the due date to file and claim their federal refund, says Bill Nemeth, president of the Georgia Association of Enrolled Agents.
Late last year, Nemeth helped a troubled taxpayer receive a refund due from a 2007 return. The taxpayer had filed an extension, but not the return, Nemeth recalls. He advised the taxpayer to prepare the return, and he narrowly made the filing deadline.
“Bottom line: file timely whether you owe or not,” he says.