Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, breaks down tax extensions. Can anyone file a tax extension? When is the deadline to file?
A tax extension is an additional 6-month period the IRS grants a taxpayer to file their tax return. It is not an extension to pay your taxes. That said, failure to pay your taxes by the original due date will result in a Failure to Pay penalty. The Failure to Pay penalty is currently 0.5% of your unpaid tax bill for every month or partial month the tax remains unpaid, up to a maximum of 25% of your tax bill.
Anyone can file a tax extension, including individuals and businesses. However, you must file your tax extension before the original due date of the return. If you don’t, your return will be considered late, and you will begin to incur penalties and interest.
If you’re an individual who is trying to file a tax extension, you’ll need to file IRS Form 4868, also known as the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. As a business, you will need to file IRS Form 7004, which is the Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
Next week, Phil will discuss how to mitigate or remove IRS penalties and interest. See you next Friday!
The April 18th tax deadline passed, and you did not file your tax return. Now what? First, don’t panic. Not everyone needs to file a tax return. Typically, if you earn less than the standard deduction associated with your filing status, you do not need to file a return. On the other hand, if you did not file a tax return even though you were required to, you might have an issue. Here’s what happens if you don’t file your taxes.
You will be charged a Failure to File penalty.
If you did not file a tax return when you were required to, the IRS will charge you a Failure to File penalty. This penalty is currently 5% of the unpaid taxes for each month or partial month that a tax return is late, up to 25% of your total unpaid tax bill. If you are due to receive a tax refund, then you will not receive a penalty for failing to file. However, not filing may result in losing that refund. Keep in mind, a tax refund can be only claimed within 3 years of its due date.
You will be charged a Failure to Pay penalty.
If you owe a tax balance and do not file your taxes, you will be penalized for failing to pay your tax bill. In 2023, the Failure to Pay penalty is 0.5% for each month or partial month your tax balance goes unpaid, up to 25% of your total tax bill. If both a Failure to Pay and a Failure to File penalty are applied in the same month, the Failure to File penalty will be reduced by the amount of the Failure to Pay penalty applied in that month. For example, instead of a 5% Failure to File penalty for the month, the IRS would apply a 4.5% Failure to File penalty and a 0.5% Failure to Pay penalty.
Your tax bill will accrue interest.
If you do not file your taxes, the IRS will assess interest on your unpaid taxes, even if you do not receive a Failure to File penalty. Even worse, the IRS begins accruing this interest beginning on the date your taxes are due, which is April 18th in 2023. If you do receive the Failure to File penalty, not only will you incur interest on your unpaid taxes, but on the penalty as well. Underpayment interest rates can change each quarter. The interest rate through June 2023 is 7% per year, the highest it has ever been. This essentially means that having a tax balance is more expensive than ever.
The IRS may file a return on your behalf.
In some cases, the IRS will file a substitute tax return on your behalf using tax documents that were sent to them from your employers and financial institutions. What they will not do, however, is try to reduce your tax liability with credits and deductions. If you still take no action, the IRS will continue processing the return and charge you any taxes owed.
The IRS statute of limitations is delayed.
Some may think that they can avoid filing a tax return for many years and the IRS will lose its power to enforce after the 10-year statute of limitations ends. However, the statute of limitations does not begin until a tax return is actually filed. This means that the unfiled tax return will essentially follow you until you file it. If you wait too long though, you risk losing out on refunds and tax credits.
What Should I Do If I Didn’t File My Taxes?
The simple answer to this question is to file immediately. The tax deadline has passed, and so has the deadline to request a tax extension. However, penalties and interest will be minimized if you file a tax return now. Some taxpayers do not file because they know they cannot afford to pay taxes they owe, but not filing and not paying only escalates the issue at hand. If you need help with your tax debt, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.