Each tax season, many business owners and individuals discover they owe the IRS late filing penalties and/or late payment penalties. But, more often than not, the average taxpayer is confused about when each penalty occurs, the difference, and how they affect each other.
We thought we’d clear up any confusion about what these penalties are, when they occur, and how to avoid them. Below is our breakdown.
Late Filing Penalty
A late filing penalty is the penalty you incur if you do not file your taxes on time (and still applies even if you filed an extension—Form 4868—on time). This means you submitted your actual tax forms and paperwork after the IRS deadline, whether you e-filed or sent in physical paperwork, or filed an extension informing the IRS that you would submit your tax forms late.
The Penalty Cost
The late filing penalty is 4-5% of your tax amount owed, per month late the filing is, plus interest.
If you file an extension, this only temporarily extends your late filing penalty. If you’ve filed an extension and aren’t sure what to do next, read What to Do After Filing an Income Tax Extension.
How to Avoid this Penalty
There are a few key steps to ensure you are not subject to a late filing penalty.
- Monitor Tax Due Dates and Deadlines and always submit your forms before the deadline
- If you are working with a CPA, provide your W2’s, 1099’s, and other forms as soon as you have them
- Make sure your documents and paperwork is accurate and without errors.
How late is too late? If you don’t file your taxes after three years, you are no longer eligible for a refund.
Common Reasons People File Late
Unfortunately, late filing isn’t an uncommon occurrence.
Many factors can impact a person or business’ ability to file on time. While it’s not unusual for someone to not realize the deadline is pending, other factors that can impact filing on time include getting paperwork (like W2’s) late, providing paperwork to your CPA too close to the deadline
(Remember: CPAs have a roster of clients, and typically work round the clock during tax season to ensure their client’s taxes get filed. This is why it’s important to provide your paperwork to your CPA as soon as you have it). Health issue, unexpected emergencies, and sometimes life gets in the way of filing late.)
If you know your filing is going to be late, you can still pay your taxes before you officially file to avoid or lower a late payment penalty.
Late Payment Penalty
A late payment penalty comes into play if you do not pay your taxes by the due date. You may or may not have filed on time, but you will incur a penalty if you pay your taxes after the due date.
The Penalty Cost
The late payment penalty is 0.5% of your tax amount owed per month past the payment deadline, plus interest.
The IRS will charge you underpayment interest if you don’t pay by the due date, even if you file an extension or file your taxes on time. In short, the late payment and late filing penalties are levied separately.
How to Avoid this Penalty
To avoid a late payment penalty, you might want to consider:
- Paying as much of the payment as possible by the tax deadline
- Monitoring Tax Due Dates and Deadlines and paying before or by the deadline.
- If you are working with a CPA, providing your documents as soon as you have them
- Working with your CPA to determine best payment strategy
- Paying quarterly (if self-employed 1040)
- Calculating the amount you owe based on Current Tax Brackets
Some CPAs will advise the you pay as much as possible, even if you don’t have a concrete estimate of how much you will owe. We always recommend consulting with your CPA if you anticipate a payment issue, as they will give you the best advice for your specific case.
Common Reasons People Pay Late
Every year there are people who pay their taxes late. Sometimes it can be a forgotten tax deadline (particularly for those who pay quarterly estimates) or calculating off of outdated tax bracket percentages. Sometimes, people do not set aside enough for taxes, or claim incorrectly on their W4s and their employers do not draw enough or any at all. Extenuating circumstances can also pop up, with everything from family and medical emergencies to simply not having enough to pay.
Whatever your circumstances are, alerting your accountant as soon as you know you may not be able to pay on time ensures you can make an informed and strategic choice about how you move forward.
When Late Filing and Late Payment Coincide
You can file your taxes late, but pay on time; pay your taxes late, but file on time; or even file and pay your taxes late. And, while the two can affect each other, it’s best to think of these as two separate penalties with two separate causes.
Filing your taxes on time, for example, does not mean you won’t incur a penalty if you still submit your payment late.
At the same time, paying your taxes on time does not mean you won’t incur a penalty if you file after the deadline.
Below, we get a little more specific.
Paid and Filed on Time
If you filed and paid your taxes by the deadline, you should be good to go (provided you paid the correct amounts and did not have any major errors)
Filed Late, but Paid On Time
If you filed late, but paid on time, the late filing penalty is usually applied at 5% of your tax burden per month.
Paid Late, but Filed On Time
If you paid late, but filed your taxes on time (either you filed by the deadline or filed a tax extension, but did not pay), then your penalty could be as low as 0.5% of your tax burden per month.
Filed and Paid Late
If you did not file or pay your taxes on time, then your late filing penalty may be reduced by the late payment penalty, which typically results in a penalty of 4.5% of your tax burden per month.
However, because these penalties accrue monthly, they will increase the more time passes, and could add up to 25% of your unpaid taxes.
Sound Confusing and Complicated? It is!
If you’re confused about how this work or how much you will be penalized, you are not alone. Because your penalty is determined by IRS tax codes and impacted by your total tax burden and the amount of time that has passed, plus the IRS’s interest rate, your penalties will require a lot of calculations and the result will be specific to your circumstances.
While it might seem like filing and paying your taxes is an all-or-nothing, on-time or not event, that’s not always the case. If you find yourself facing a circumstance like this, speak with a CPA to fully understand your options. In fact, it’s often in the face of or after incurring a late payment or filing fee that an individual will first turn to a CPA.