Why You Should File Your Taxes on Time Even if You Can’t Pay
The IRS just announced that January 27, 2020 will be the official start of tax season for individuals. I consider it important to remind people that if you cannot pay your taxes, don’t panic, just make sure to file your taxes on time even if you cannot pay your taxes in full.
It is not a crime to file a tax return with a balance due. Sure, the IRS will know quickly that you didn’t pay your taxes in full but that doesn’t mean the IRS is going to start garnishing your wages or freezing your bank account the next day. You do have rights and you do have options for getting caught up with your unpaid taxes. The primary reason you want to file on time is to avoid a nasty penalty: the failure to file penalty.
What is the Failure to File Penalty?
If you do not file your taxes on time, meaning on or before April 15th (or by October 15th, if you get an extension) then you will be hit with a failure to file penalty of 5% per month, on the outstanding balance due, up to a maximum of 25%. Let’s say you have a balance due of $5,000. One day late means you have a penalty of $250; over five months late means a maximum penalty of $1,250.
Compare these numbers to the failure to pay penalty. Failure to pay penalty is .5% per month, up to a maximum of 25%. So if you do not pay your taxes in full on April 15th (sorry but there is no extension to pay up to October 15th) then you would be subject to a penalty of $25 not $250 for the month of April. Also consider that it takes only 5 months to reach the maximum penalty for failure to file whereas it takes 50 months to reach the maximum penalty.
File Your Taxes on Time! You Have Other Ways to Handle the Unpaid Taxes.
So, the message here is clear: even if you cannot pay – file your taxes on time anyway. You can avoid a nasty penalty and there are always options to resolve your tax debts which don’t crush you financially. The IRS regularly sets up payments plans on outstanding tax debts. If you are financially unable to pay in full then you may qualify for hardship status or a debt settlement with the IRS. Even, if you filed late then there is still hope. The IRS offers penalty abatement so there is still a chance you can reverse this error.
The key here is that you have options if you cannot pay. Just don’t make the mistake of adding a failure to file penalty on top of what you owe.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your unpaid taxes, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043