As many have heard, the 2020 individual income tax filing deadline was moved to May 17, 2021. This deadline is fast approaching, and it is important for individuals to have a good handle on their current tax situation. Any potential tax liability for 2020 must be paid by May 17, 2021 to avoid penalties imposed by the IRS. Here are the basic rules.
Failure to pay
Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 1/2% for each month (or partial month) the payment is late. For example, if payment is due May 17 and is made June 22, the penalty is 1% (1/2% times 2 months or partial months). The maximum penalty is 25%.
The failure-to-pay penalty is based on the amount shown as due on the return less amounts paid through withholding or estimated payments.
Failure to file
The failure-to-file penalty runs at a more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. Please keep in mind that an extension of time is available for those individuals that can’t file by May 17, 2021. Form 4868 can be used to file an extension. This extends the due date to October 15, 2021. If you obtain an extension to file, you are not filing late unless you miss the extended due date. However, keep in mind that an extension is only an extension of time to file. It is NOT an extension to pay your tax liability.
If the 1/2% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or partial month) so the total combined penalty is 5%. The maximum combined penalty for the first five months is 25%. After that, the failure-to-pay penalty can continue at 1/2% per month for 45 more months (an additional 22.5%). Thus, the combined penalties could reach 47.5% over time.
The failure-to-file penalty is also more severe because it is based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments. So, if no amount is owed, there is no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payments), the combined penalties would be 15%, which equals $750 ((.5% + 4.5%) x 3 x 5,000). If the actual tax liability is later determined to be an additional $1,000, the failure to file penalty (4.5% × 3 = 13.5%) would also apply for an additional $135 in penalties.
A minimum failure to file penalty will also apply if you file your return more than 60 days late. This minimum penalty is the lesser of $210 or the tax amount required to be shown on the return.
Facing Penalties – Is there any relief?
Both penalties discussed in this article may be excused by the IRS if you can demonstrate “reasonable cause.” Some qualifying excuses include death or serious illness in the immediate family and postal irregularities. Please note, to request reasonable cause a letter to the IRS is necessary to explain your reasonable cause and potentially provided support. The IRS will evaluate the circumstances and make a determination.
As you can see, filing and paying late can get expensive. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can reach 15% per month, with a 75% maximum.
When in doubt consult your Wegner CPAs tax professional for guidance on how to minimize penalties. You have options and we are happy to help guide you through the process.