Consequence of Filing Your Tax Return Late or Failure to Pay Taxes
By: Vani Murthy, CPA, M.S. Tax
Here are some simple steps to avoid a late filing or payment penalty, or both:
1. File an Extension
It gives you an additional six months to get organized and file your taxes. It is as simple as mailing the extension request or submitting electronically. However, an extension request must report the full amount of properly estimated tax. Make sure to file an extension containing the appropriate information, as the penalty for not filing a timely tax return can add up quickly.
2. Pay Your Taxes
An extension to file does not extend time to pay. Taxes are still due on or before the deadline, so make sure you pay the amount owed in a timely manner. If a taxpayer pays at least 90% of the tax due with the extension request, they may not face a penalty for failure-to-pay. However, they must pay the remaining balance by the extended due date, and they will owe interest on the tax paid after the April 17 deadline.
There are several ways to pay tax. For individuals, the IRS offers “IRS Direct pay,” which is a fast, easy and free option to pay directly from your checking or savings account. You can also request a payment plan using the “Online Payment Agreement” tool at IRS.gov. Another popular option is to mail your check with the extension request, in which case it is advisable to use certified mail with return receipt, so you have proof of timely mailing. Such proof is accepted by the IRS to demonstrate timely compliance.
3. No Penalties if There is Reasonable Cause
Sometimes there are situations that are beyond a taxpayer’s control which may affect the ability to timely file a tax return. In such an event, the taxpayer will not be subject to penalties for failure-to-file or failure-to-pay if they can show reasonable cause.
According to the IRS, the following are some of the examples of reasonable cause for not filing a tax return on time:
• Fire, casualty, natural disaster or other disturbances.
• Inability to obtain records.
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
• Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.
• Lack of funds is not a reasonable cause for failure-to-file your tax return. However, the reasons for lack of funds may meet reasonable cause criteria for failure-to-pay penalty waiver.
Reasonable cause is based on facts and circumstances. A taxpayer is responsible for providing documentation to demonstrate reasonable cause. Hospital records, court records or documentation of any casualties or other events is helpful when the IRS evaluates an explanation for failure-to-file a return or failure-to-pay taxes.
Forgetting to file a tax return or claiming forgetfulness or an oversight by another party is not in line with ordinary business care and prudence standard and so cannot be used as a basis for reasonable cause. It is taxpayer’s responsibility to timely file their tax return and make timely payments.
According to guidance provided by the IRS on its website and in IRS publications, the following factors are considered to evaluate conditions for reasonable cause:
• What happened and when did it happen?
• What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file or pay your taxes timely?
• How did the facts and circumstances affect your ability to file your return or pay your taxes or perform your other day-to-day responsibilities?
• Once the facts and circumstances changed, what actions did you take to file and pay your taxes?
• In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?
Consider the points above when you prepare documentation to support your position when explaining inability to comply timely.
Note that a successful demonstration of reasonable cause will waive penalties, but not any interest due to the IRS. Interest will be reduced or removed to the extent associated with a penalty charge that is reduced or removed, but not on the tax itself. If you continue to owe taxes, interest will accrue until you have fully paid your taxes.
In the US, the self-assessment system of tax liability and payment is based on the principle of voluntary compliance. This means taxpayers must make a good faith effort to meet tax compliance obligations. According to the IRS, penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.
The penalty for filing a frivolous tax return is $5,000. Do not be persuaded to take a frivolous tax position, or listen to frivolous arguments suggesting you do not have to not file a tax return or pay taxes. Every year the IRS rolls out its “Dirty Dozen” tax scams list which includes taxpayers using frivolous tax arguments to avoid paying taxes. Some of the most common frivolous tax arguments are also listed in its “The Truth about Frivolous Tax Arguments” document.
“Taxpayers should steer clear of tax-avoidance arguments and the unscrupulous promoters of such schemes,” said former IRS Commissioner John Koskinen. “Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well.”
Vani Murthy, CPA, M.S. Tax, is a tax manager in the Chicago office of CBIZ MHM. She has 10 years of experience in business and individual tax matters, non-profits, international tax compliance and tax research.