Filing and Paying Late: Don't Do It! Get an Extension! But if you do...

It's getting to the point in tax season where you might be worried about not filing, filing late, paying late, or both. You don't need me to tell you that you shouldn't file or pay late, but you may wonder what happens if you don't. Here's the short version:

1. If you don't file the IRS may estimate your tax liability using whatever info it has on hand, and send you a bill for what it thinks you owe.
2. If you file late and owe money, the IRS may charge you a penalty of 5% of the amount you owe per month, for the first five months. That means that if you file 5 months late and owe $1000, you could quickly face a penalty of $250!
3. If you file on time but pay late, the IRS can charge a penalty of 0.5% per month up to a maximum of 25%.

What should jump out at you is that the total maximum penalty is the same in scenarios (2) and (3), but that you get penalized much more quickly when you file a late return - ten times faster! If you file on time, it can take years to reach the maximum penalty.

In fact, as long as you file on time, having a debt outstanding to the IRS isn't all that bad: Your effective penalty rate is just north of 6%, and your interest rate is the federal short-term rate (currently 1.5%) plus 3%. So all in all, having a debt outstanding to the IRS means penalties/interest accumulating at a rate of somewhere just shy of 11%. Not great, but better than the rate on most credit cards.

And there is no reason to ever file a late return! You can always file Form 4868, which provides an automatic extension of time to file by 6 months. Many tax professionals, including Accutax, will do this for free!

Finally, if you find yourself in a situation where you have filed or paid late, talk to a tax professional about filing for penalty abatement. It's not uncommon for the IRS to accept a variety of excuses as reason to waive/abate penalties if it's the first time you've been assessed a penalty.