It’s easy for taxes to get lost in the shuffle of life during a normal year. This past year, that shuffle was intensified by the stresses of a pandemic.
Thankfully, the IRS extended the deadline for paying 2020 taxes from April 15 to May 17, so people have a bit of extra time to get their paperwork in order.
But after that extended May 17 deadline, it will be business as usual: Late filings or payments could result in penalties and/or interest. Here’s what to expect if you’re running behind, and what you can do to mitigate the damage.
What happens if you file or pay late
If you file taxes late, the penalty is usually 5% of the tax you owe for each month your return is late (up to five months). For a return that’s more than 60 days late, the minimum penalty is $435 or the tax you owe, whichever is smaller. If you’re getting a refund from the IRS, on the other hand, then there’s no penalty for filing your return after the deadline (though that may not be true for state taxes). That said, you won’t receive the refund until you file.
If you pay taxes late, the IRS may charge interest on what you owe until the balance is paid in full.
What about consequences aside from fees? “It’s very hard to go to jail for not paying taxes,” says Chris Whalen, a certified public accountant in Red Bank, New Jersey. “You would have to owe a lot of money.” However, it is possible for the IRS to levy your paychecks or put a lien on your property if you don’t pay your tax debt. You’ll likely get several letters in the mail before that happens, so be sure to keep your address on file with the IRS up to date.
Want to avoid penalties? File on time
The easiest way to avoid penalties from the IRS is to file your taxes by the deadline, or get a tax extension if you won’t be able to do so. But there’s a key detail to know when it comes to filing an extension. “The most important thing to remember is that an extension of time to file a tax return is only an extension to file the paper,” Whalen says. “If you don’t pay any tax due, you’re going to get a late payment penalty.”
Because of this year’s extension, interest and penalties on unpaid balances won’t begin to accrue until May 17. According to Brian Miller, CPA and managing partner for Zuna Financial Services in Portland, Oregon, those penalties could be worse if you also don’t file your return on time. “If you didn’t file your taxes by the due date, the IRS is going to charge you a much higher tax percentage than if you file your taxes by the due date and just don’t pay on time,” Miller says.
Pay what you can, when you can
Once you’ve filed, try to pay your debt by the deadline since penalties and interest will start to accrue over time. If you can’t pay the balance, you can contact the IRS to set up a payment plan or offer in compromise. A payment plan, or installment agreement, lets you pay the taxes owed over a longer period of time. An offer in compromise lets you settle the tax debt for less than what you owe. Payment plans are more common and often easier to obtain than offers in compromise, and you can apply for a payment plan online.
Talk with a professional
If you owe money to the IRS, it can be intimidating to pick up the phone and ask what your options are, but according to Miller, that’s exactly what you should do.
It’s not just intimidation that keeps people from being proactive — often, taxpayers have trouble understanding the IRS, Miller says. “A lot of times it’s the verbiage accounting professionals use. And that’s why having a CPA call the IRS and work on their behalf is helpful, because we speak the same language.”
If you can’t afford to work with a tax professional, there are free tax help resources that may clarify what options would be right for you.
Alana Benson writes for NerdWallet. Email: email@example.com.
The article Haven’t Filed Your Taxes Yet? Act Soon to Avoid Penalties originally appeared on NerdWallet.
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