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The IRS may extend the deadline to file your annual tax return for 2020 until May 17, but there is no time like now to start doing so – regardless of your circumstances.
Maybe you owe money you do not currently have. Maybe your life has been turned upside down and that’s the last thing you want to do to do taxes. But do not even think about not filing a tax return.
“It’s a terrible idea,” said Nayo Carter-Gray, founder of 1.st Step account, of not if. “It’s one of the worst things you can do.”
Lisa Greene-Lewis, a tax expert at TurboTax, agrees.
“It’s definitely a bad idea,” she said. “Submit the return, even if you can not pay what you owe.”
Let’s start with the penalties. If you do not file your return, you will be fined 5% of the tax payable per month, up to a maximum of 25% of the unpaid amount.
So if you do not file $ 10,000, you will pay the fines of $ 500 per month, up to $ 2,500 in total. If you file your return but do not pay the tax you owe, the penalty is only 0.5% of the balance per month.
The IRS also charges interest on arrears at the rate of the federal short-term interest rate plus 3%. The rate is currently at 3% and is reviewed every three months.
The interest will start accruing from the new deadline on May 17 until you pay the tax due. (The deadline for paying quarterly taxes remains April 15.)
If you are unable to file the return in time, the solution is to file IRS Form 4868 for an extension. This gives you an extra five months – until October 15 – to put the return together. Businesses applying for an extension use Form 7004, although the deadline for sole proprietorships, partnerships and other ongoing business entities was March 15. However, the IRS expects you to pay your estimated taxes along with the extension.
“A lot of people think an extension gives you extra time to pay taxes you can owe,” Greene-Lewis said. “It does not.”
In other words, if you do not pay your estimated tax when you file an extension, you are still liable for the monthly penalty of 0.5%, as well as the current monthly interest of 3% charged on the balance due.
Failure to file a return and / or pay taxes also has consequences beyond the direct fines. Each year, the IRS reports more than $ 1 billion in unclaimed taxpayer repayments. Much of this is due to the fact that people do not submit returns because they are below the income threshold for the submission requirement.
The threshold currently stands at $ 12,400 for individuals and $ 24,800 for cohabiting couples. Many of the individuals are eligible for repayable credits, Greene-Lewis said, and may never know unless they file a return. Taxpayers have up to three years to claim refunds.
Because of the variety of tax benefits in the three coronavirus relief packages over the past year, people can also miss out on valuable government benefits and payments if they do not file them.
For example, if you did not receive the full stimulus payments you were eligible for last year, you can get a refund credit – but only if you file a tax return. “There were a lot of changes in the tax code last year that affect people,” Greene-Lewis said. “If you submit a return, let us know where you stand.”
Carter-Gray said it would be bad for people if you ignored tax obligations. The IRS can use the information about your income to file a “substitute for return” and thus determine a tax liability for you. To say the least, the agency does not provide all the deductions and credits you may be eligible for.
What’s more, facing your personal bankruptcy will complicate the complicated situation if you do not file a return. “You have to file a return to put tax debt in the pot for bankruptcy purposes,” Carter-Gray said.
Taxpayers who cannot pay what 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 works with people who for years fail to file a return – and says it’s ugly.
“The IRS can place liens on your property and decorate your wages,” she said. “Agree, because you really do not want it.”