FILING LATE CAN COST YOU DEARLY
Many people choose to file late. But it can cost you.
Six bad things can happen when you file your tax return late. (We bet there may be more.)
You can extend your tax return and file during the period of extension; that’s not a late-filed return. A late-filed return is filed after the extension expires. That’s what causes the Six Bad Things to happen.
Many of these Bad Things occur because:
- You filed after the due date without filing an extension
- You filed after the extended due date
- You filed after the due date but owe money and did not pay on time
Bad Thing 1
The IRS notices that you filed late or not at all.
Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.
For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.
Simply stated, bad thing 1 is this: file late and increase your odds of saying, “Hello, IRS examiner.”
Bad Thing 2
When you file late, you trigger the big 5 percent a month, not to exceed 25 percent of the tax-due, penalty.
Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent of the tax due.
Bad Thing 3
Of course, if you owe the “failure to file” penalty, you will likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due.
The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply.
But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).
Bad thing 4
You potentially owe estimated taxes based on your prior return and you either didn’t pay them or pay too little. This triggers yet another set of penalties and interest for failure to pay estimates and/or failure to pay sufficient estimates.
Bad thing 5
You need to do some refinancing and your return is not even close to being ready. If it’s a mortgage and the agent wants to get an IRS transcript of your return, you won’t be able to get one for at least 6 weeks from the time you e-file, which may delay your mortgage refinancing.
Bad thing 6
If you’re a business owner, you might not even know that the bank may refuse your loan or charge you a higher interest for late filing because they see you as a risk since you don’t even know your financial information.
Don’t let the six bad things happen to you.
There is no excuse for filing late with all the tools available, such as QuickBooks and other automated systems where you can link your bank and credit card accounts to quickly categorize all your business transactions? Avoid the daunting and time-consuming task of sorting through a pile of receipts at the end of the year trying to make sure you don’t miss a deduction!
NOTE: Some of this narrative comes from the Bradford Tax Institute for which I am a subscriber. I’ve added to their Bad Things list.