Every year on Tax Day, people who have procrastinated ask this question. What is the big deal if I don’t file my taxes on time? What will happen if I don’t file or if I don’t file an extension? What’s the worst that could happen?
Are you getting a refund?
If you’re getting a refund, nothing happens. You don’t necessarily need to file an extension, but you can. You must file within 3 years in order to claim your refund, or the government gets to keep your money. For 2016 taxes, you must file by April 18, 2020 to claim your refund. If you file an extension, you have until October 16, 2020.
Do you owe?
If you have a tax liability, however, the story is a little different. If you do not file or request an extension, you will be subject to a Failure-to-File Penalty. The Failure-to-File Penalty is 5% of your unpaid tax liability for every month after the April deadline that your tax bill is not paid, up to 25%!
If your tax liability is $1000, your Failure-File-Penalty would be roughly $50 for the first month for a total of $1050. The additional penalties would be a Failure-to-Pay Penalty, which is .5% of the taxes due, as well as interest 3% interest. The thing you must realize as well is that the Failure-to-Pay and accrued interest would be on $1050, not the original $1000.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
The IRS will send you ‘gentle’ reminder letters to file your taxes. If you ignore the IRS, which I never recommend, they may file a substitute return on your behalf. The issue with this option is that the IRS may not apply all the deductions and credits to which you are entitled.
Home Business Owner?
For my Home Business Owner Crew or Self-Employed, you must file your taxes within 3 years, regardless of whether or not you owe. By not doing so, you will lose any Social Security credits towards your retirement… Assuming Social Security will still exist. #Jab
People who are chronic non-filers, and owe taxes, are subject to additional penalties and possibly criminal prosecution.
The take-away: File your taxes or request an extension by the April deadline – even if you can’t pay your tax liability. If you are expecting a refund, file an extension as insurance so that if you are mistaken, you will not incur the additional Failure-to-File penalty.
Let’s win the tax game!