Facts to Know if You File and Pay Your Federal Taxes After April 18, 2017

April 18 was the deadline this year for most people to file their annual federal income tax returns and pay any taxes they owed. However, it’s not unusual for tax practitioners to receive a phone call from a taxpayer who has not filed their return or paid their taxes by the due date. When this happens, the usual follow-up question is “What happens now?”

Contrary to popular belief, an Internal Revenue Service agent will not usually land on your doorstep the next day. If a taxpayer is due a refund, there is no penalty for late filing. However, if the taxpayer owes tax, they will likely pay penalties and interest on any tax paid late.

There are several different types of penalties to consider:

Late Payment: If a taxpayer files a return but doesn’t pay all the tax owed on time, they will likely be subject to a late payment penalty. The penalty is 0.5 percent of the taxpayer’s unpaid taxes per month or part of a month, up to a maximum of 25 percent of the unpaid tax amount. The penalty increases to 1 percent if the tax remains upaid 10 days after the IRS issues a notice of intent to levy property.

Late Filing: If a taxpayer owes tax and doesn’t file a tax return on time, there is also a penalty for late filing. This penalty is usually 5 percent of the tax owed per month or part of the month in which the return is filed, up to a maximum of 25 percent. If a return is filed more than 60 days after the due date or extended due date, there is a minumum penalty of the lesser of $205 or 100 percent of the unpaid tax.

If a taxpayer is subject to both the late payment and late filing penalties, the maximum amount charged for the two penalties is 5 percent per month.

Interest will also accrue on any unpaid tax from the due date of the return until the date the tax is paid in full. The interest rate is determined quarterly using the federal short-term rate, plus 3 percent, compounded daily.

So, how does a taxpayer avoid and/or minimize these penalties?

1. Request an extension of time to file your tax return and pay at least 90 percent of the taxes owed. In doing so, the taxpayer may not be subject to the failure-to-pay penalty. However, interest will continue to accrue on any taxes paid after the April 18 due date.
2. File and pay as soon as possible to keep interest and penalties to a minimum.
3. If a reasonable cause for not filing or paying on time can be shown, the taxpayer may not be subject to a failure-to-file or failure-to-pay penalty. Some examples of reasonable cause as outlined on the IRS website are:

1. Being a member of the Armed Forces and serving in a combat zone or contingency operation.
2. Being a citizen or resident alien working abroad.
3. Being a victim in certain disaster situations, for which the IRS has extended the filing and payment deadlines.

In addition, the IRS provides taxpayers several options for paying any tax liability, including payments plans, on the agency’s website (www.irs.gov/payments).

If you have any questions understanding these penalties and payment options, please contact your Marcum tax professional for assistance.