The IRS receives between 165 and 170 million tax returns every year. More than 350 Billion dollars is refunded to taxpayers who overpay each year. But for the approximately 40 million people who under paid, filing taxes late can have cost them even more than they bargained for.
What Is a Tax Return?
Tax returns are an annual federal financial report that assembles and reports tax payments, tax deductions, credits, and income received for money earned during the prior calendar (or tax) year.
Preparing your tax return can range from incredibly simple with a Form 1040 only listing your income, standard deduction, and pertinent personal information to extremely complicated with the need for hiring a tax professional.
This is especially the case if you have self-employment or freelance business income, make contributions to an IRA, or seek to add additional schedules for reporting more complex passive income investments or tax positions.
A variety of options are available to you for proceeding with filing your tax return. Your filing decision may be more complicated than just choosing which form(s) to use and can include considerations such as whether or not to wait before paying, what payment plans are available, if and how amending returns may affect the amount due, what extensions for payment are available, and which penalties may apply if you don't pay.
The IRS offers various payment options for settling your tax debt, including the spread-out payment plan known as the Installment Agreement (IA). Different methods may be seen as more advantageous depending on your particular financial status, but this is something you must evaluate yourself.
Do I Need to File a Return?
Depending on your situation, you might not even need to file a tax return to begin with.
That's right. The IRS may not require you to file an individual tax return (Form 1040), depending on three specific criteria you must meet, usually:
- Your Age
- Filing Status
- Gross Income
Minors don't need to file tax returns. However, their parents or guardians may if they qualify for the Kiddie Tax, meaning they owe taxes on income from investment accounts for kids or earned income – which they can contribute to custodial Roth IRAs for kids and reap decades of compounding returns.
If you're 18 or older and not claimed as a dependent by parents or guardians, you may need to file. Exceptions exist, based on gross income requirements and filing status.
For those, you’ll need to earn more than the applicable standard deduction by appropriate filing status for your situation:
- If you file as a single taxpayer or a married person who is filing separately: $12,950
- If you’re 65+, then it’s $14,350
- If you file jointly as a married couple: $25,900
- If you and your spouse are 65+, then it’s $28,700.
- Otherwise, each 65+ person gets an additional $1,400 on top of the $25,900 standard deduction
- Head of household: $19,400
- 65+ is $21,150
When you earn income above these dollar thresholds stated above by filing status, you'll need to file a federal income tax return (Form 1040). That doesn't exclude the need to file one if you earn under these amounts, though.
But if you recall some of the confusion with the stimulus checks of 2020 and 2021, you might consider filing a return, even if you don't exceed these limits above.
If You Don’t File Taxes
Not filing a return gets costly, very quickly.
1. Penalties and Interest
First things first. You're going to get hit with penalties and interest. If you didn't expect that right off the bat, you don't know the federal government. These dis-incentives usually are enough to entice most to file a return without a fight.
Wouldn't you rather pay $50 – $100 to file your taxes with softwarethan face the long arm of Uncle Sam's fee schedule? Or, even better, file easier returns for free with the IRS Free File Alliance if you earn below certain annual thresholds.
Penalties are the worst. They're not any better coming from the federal government. For failing to file a return when you are technically required to do so, they slap you with a late-filing penalty worth 5% of the tax owed per month in most circumstances.
Because there's a 25% maximum the IRS will assess, you'll pay this each month for five months you fail to file.
Let's say you owe $10,000 in taxes and fail to file a return documenting your tax liability. That means you'll pay 5% of that balance every month for five months, or $500 per month!
If you owe next-to-nothing and you file your return over 60 days late, the IRS still hits you with a minimum penalty of the smaller of $135 or 100% of the tax owed.
There's interest as well.
The IRS charges interest worth 0.5% of the tax amount you owe per month that you’re late from the original due date.
If you owe $1,000 to the IRS but don't file for a month after the federal filing deadline (Monday, April 18th this year), that’ll be $5 owed in interest.
Not blisteringly scary—yet. If you owe $25,000, that's $125. Per month. Don't file for a year? $125 x 12 = $1,500.
But, you might not be so lucky only to pay the 0.5% per month your balance remains unpaid, and you fail to file a return. The IRS can double the rate to 1% per month if you don't pay the amount owed after ten days of receiving the IRS' notice of intent to levy.
That will continue to grow until you pay or bump up against the total 25% maximum penalty.
2. The IRS Files a Substitute Return for You
Don't let this happen. The tax deductions and credits that you think you're entitled to claim? It likely won't go down the way you like.
The IRS will file a substitute return and won't fully capture your tax situation because you didn't give them the details to form one.
A substitute return won't include all the details you'd like shown about your tax picture, costing you money for not claiming applicable deductions, credits, or other tax items which benefit your bottom line.
3. The IRS Begins the Collections Process
The IRS comes after you for money they think you owe them.
They've got a war chest of ways to extract what you owe: wage garnishment, levy money directly from your bank accounts, or even placing a federal lien against your property.
Just file your return and pay what you owe. And even if you can't pay what you owe on tax day, you've got options!
Also, if you need to file an extension, this will give you more time to prepare your tax return (up to 180 days).
You will still need to pay the tax you think you will owe, or you will face penalties and interest for not paying your balance.
What Should I Do if I Can’t Pay My Tax Bill?
People who are in a position to pay their taxes should make payments as they go.
That means that you are showing people that you are acting in good faith to pay what you owe, and this will also lower the amount of money you would have to pay.
If you can't manage this, you still have some other options strongly worth considering.
Pay What You Can
If you can pay the full amount now, you can use an electronic funds transfer or even pay with a credit or debit card. Granted, don't forget that you will also owe interest charges if you carry a balance on your credit card.
That could get just as ugly from a financial perspective. Therefore, you'll want to be smart with how you manage paying one debt with another.
You can pay your taxes by sending a check. You can mail it or bring it to an IRS office near you.
Sign Up for a Payment Plan
If you need more time to repay your unpaid tax balance, you can file a request for an extension and then apply for an extension. There are different costs tied to establishing an installment plan.
A formula exists that considers your particular circumstances such as debt, the time frame needed to repay, etc., and determines the cost.
Don't sleep on filing your taxes on time. The costs add up quickly.
This article was produced and syndicated by Wealth of Geeks.
source https://wealthofgeeks.com/file-taxes-late/
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