PennyWise Episode 56: Some green updates may make you eligible for tax credits. Do you qualify?
Most people who are required to file 2021 tax returns will have done so by the official filing due date — Monday, April 18. Or they applied for an extension, giving them until Oct. 17 to file their returns.
But you’re not most people. You did neither.
The question now is: What are the repercussions for you and how can you minimize them?
The answers depend on whether you’re owed a refund or whether you still owe the IRS money for 2021.
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You expect a refund
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You may be very confident that the IRS owes you a refund. Let’s hope you’re right about that.
If so, the good news is you will not be subject to a failure-to-file penalty.
But you will have to file eventually if you want the money. And “eventually” means within three years, which is the statute of limitations. After that, you forfeit the right to the refund and to some related tax breaks.
“After the expiration of the three-year period, the refund statute prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid,” the IRS notes.
And if there’s any chance you’re wrong and you actually owe the IRS money, the pressure will be on to file and pay as fast as you can to minimize the financial hit.
You still owe money to the IRS
Failing to file your taxes on time and failing to pay what you owe on time are two separate violations. Each comes with its own penalty. So failing to do both can get pricey, especially since interest will accrue on both your outstanding tax balance as well as any penalties applied.
The heaviest of the two penalties is failure to file. Missing the April 18 deadline means the IRS could slap you with a penalty equal to 5% of the unpaid tax you owe for each month or part of a month that your return is late. That penalty is capped at 25%. So if you wait five or more months to file and originally owed an additional $5,000 in taxes, you will have to pay an additional $1,250 thanks to the penalty.
But if you only owe $1,000, you will end up paying more than the 25% cap because the IRS imposes a minimum penalty of $435 or 100% of your tax due, whichever is less. In other words, instead of owing an additional $250, you’d owe $435 if you wait five or more months to file.
On top of that, you also may be subject to a late payment penalty equal to 0.5% on your outstanding balance for every month or part of a month that you’re late. It, too, caps out at 25% of your outstanding balance. So if you owe $1,000 and don’t pay it for six months, you could owe another $30 ($5 a month for six months). If you delay payment longer, you would cap out at a maximum of $250.
How to minimize the financial hit
While it may be tempting to think you can retroactively apply for an extension to file after April 18, that’s a no-go.
“If your return has a balance due, after April 18 your return is delinquent, and the failure-to-file and failure-to-pay penalties apply. Interest also applies,” said Kathy Pickering, chief tax officer at H&R Block.
The same goes if you manage to file your return and pay what you owe shortly after April 18. But at least doing that will keep what you owe in penalties and interest to a minimum.
“Filing a few days after April 18 doesn’t avert the penalty altogether. However, the penalty is computed for each month or part of a month that the return is delinquent so filing as close as possible to April 18 certainly minimizes the damage,” Pickering said.
There is one scenario in which the IRS may be willing to waive the penalties altogether: If you attach a statement to your return whenever you do file documenting that you had “reasonable cause” to file and pay late.
“Reasonable cause may include fire or another type of casualty, death, serious illness, or anything incapacitating the taxpayer or a member of the taxpayer’s immediate family,” Pickering said. “It could also include loss of records, for instance, if a taxpayer’s tax records were destroyed in a flood. The taxpayer must be prepared to document the circumstances, such as providing a hospital record.”
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Strategies for managing credit card use
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4. Use credit cards for planned purchases only
5. Have an emergency fund to fall back on
6. Don’t store credit card info on websites or apps
7. Get an accountability partner
8. Update your strategy
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