The IRS may be extending the deadline to file your annual taxes for 2020 to May 17, but there’s no time like now to get started on them — no matter your circumstances.
Perhaps you owe money that you don’t currently have. Maybe your life has been turned upside down and doing your taxes is the last thing you want to do. But don’t even think about not filing a tax return.
“It’s a terrible idea,” said Nayo Carter-Gray, founder of 1st Step Accounting, of not filing. “It’s one of the worst things you can do.”
Lisa Greene-Lewis, a tax expert at TurboTax, concurs.
“It is definitely a bad idea,” she said. “File the return even if you can’t pay what you owe.”
Let’s start with the penalties. If you don’t file your return, you’ll be assessed a penalty of 5% of the taxes due per month, up to a maximum of 25% of the unpaid amount.
So, if you don’t file and owe $10,000, the penalties accrue at the rate of $500 per month, up to $2,500 in total. If you do file your return but don’t pay the taxes you owe, the penalty is only 0.5% of the balance due per month.
The IRS also charges interest on overdue taxes at the rate of the federal short-term interest rate plus 3%. That rate currently stands at 3% and is reviewed every three months.
The interest will start accumulating from the new May 17 filing deadline until you pay the taxes owed. (The deadline for paying quarterly taxes remains April 15.)
If you are unable to file the return on time, one solution is to file for an extension using IRS Form 4868. It gives you an extra five months — until Oct. 15 — to pull the return together. Businesses filing for an extension use Form 7004, though the filing deadline for sole proprietorships, partnerships and other pass-through business entities was March 15. The IRS, however, does expect you to pay your estimated taxes along with the extension.
“A lot of people think that an extension gives you extra time to pay taxes you might owe,” said Greene-Lewis. “It doesn’t.”
In other words, if you don’t pay your estimated taxes due when filing for an extension, you’re still liable for the 0.5% monthly penalty, as well as the current 3% monthly interest charged on the balance due.
Failing to file a return and/or pay taxes due, has consequences beyond the direct monetary penalties, as well. Every year, the IRS reports more than $1 billion in unclaimed taxpayer refunds. Much of that is the result of people not filing returns because they are under the income threshold for the filing requirement.
That threshold currently stands at $12,400 for individuals and $24,800 for married couples filing jointly. Many of those individuals are eligible for refundable credits, said Greene-Lewis, and may never know it unless they file a return. Taxpayers have up to three years to claim refunds.
With the variety of tax benefits in the three coronavirus relief packages over the past year, people may also miss out on valuable benefits and payments from the government if they don’t file.
For example, if you did not receive the full stimulus payments you were eligible for last year, you can get a recovery rebate credit — but only if you file a tax return. “There were a lot of changes in the tax code last year that affect people,” said Greene-Lewis. “Filing a return let’s you know where you stand.”
For people in dire financial straits, ignoring your tax liabilities will make things much worse, said Carter-Gray. The IRS may use information it has on your income to file a “substitute for return” and thereby assess a tax liability for you. To say the least, the agency won’t give you all the deductions and credits you may be eligible for.
What’s more, if you’re facing personal bankruptcy, failing to file a return will complicate matters. “You have to file a return in order to put tax debt into the pot for bankruptcy purposes,” said Carter-Gray.
Taxpayers unable to pay taxes they owe can arrange a payment plan with the IRS, but again, only if they file a return or at least an extension. Carter-Gray has worked with people who have failed to file returns for many years — and says it is ugly.
“The IRS can put liens on your property and garnish your wages,” she said. “Get into compliance, because you really don’t want that.”
Source: Business - cnbc.com
