The tax deadline has come and gone for most taxpayers with a few exceptions for unusual events like federally declared disasters. If you missed the tax deadline you need to get caught up, but it’s probably not the end of the world.
If you file your tax return late and there was no tax due there is no penalty if you are an individual. If you are a business there could be penalties. In this article we are going to focus solely on individual taxpayers. Call your accountant for more details if you are a business who missed the deadline.
As an individual, if you owe tax there is a 5% failure-to-file penalty on unpaid taxes, per month, up to 25% (or five months). The Failure to Pay penalty is a 0.5% penalty on unpaid taxes, per month, up to 25% (or 50 months). Interest also accrues on both the unpaid taxes and the outstanding penalties. If both penalties apply you generally are only subject to a maximum of 5% per month.
If you keep waiting and you are more than 60 days late the failure-to-file penalty changes to a minimum of the smaller of $435 (for 2021, this amount typically increases each year) or 100% of the unpaid tax. If this is less than the 5% penalty, the larger penalty still applies.
Let’s see some examples, we have:
- Mr. Smith who owes $100
- Mr. Jones who owes $500
- Mr. Brown who owes $50,000
All of these taxpayers extended their tax returns in May 2021 and for our example, it’s December 16th, 2021 and they are more than 60 days late.
From May 17 – October 15 each of these taxpayers had penalties of 0.5% per month on unpaid taxes.
- Mr. Smith owes $100 x 0.5% x 5months = $2.50
- Mr. Jones owes $500 x 0.5% x 5months = $12.50
- Mr. Brown owes $50,000 x 0.5% x 5months = $1,250
On October 16th these taxpayers triggered the failure to file penalty. Now their penalty increases to a maximum of 5% per month. From October 16 – December 14 (60 days) their penalties are the following:
- Mr. Smith owes $100 x 5% x 2months = $10
- Mr. Jones owe $500 x $5% x2months = $50
- Mr. Brown Owes $50,000 x 5% x 2months = $5,000
On December 16th they all go over the 60 day threshold:
- Mr. Smith owes $100 because $100<$435
- Mr. Jones owes $435 because $500>$435
- Mr. Brown owes $5,000 as calculated above because we are still in month two of the failure to file penalty, although the smaller of his total tax or $435 is $435, his calculated penalty is larger so he must pay the calculated penalty.
The failure to file penalty and the failure to pay penalty will combine, again, not to exceed a total of 5% per month, and accrue interest (currently at 3%) so on December 16th they will owe a bit more than the figures calculated above. Our tax software calculates the following total penalties and interest due on December 16:
- Mr. Smith - $108
- Mr. Jones - $465
- Mr. Brown - $9,417
Keep in mind that as long as you extended your tax return you are only a few days late. You should file your taxes and pay your liabilities as soon as possible to minimize any penalties.
If you are concerned about the amount of penalties you could incur for filing or paying late, the IRS does allow waivers due to reasonable cause and they also offer a first time abatement of penalties. Contact your accountant if you have any concerns and follow us on LinkedIn to stay up to date on all of our posts.
Wondering what the deal is with the new Advance Child Tax Credit Payment? For some, opting out of the payments makes more sense. Learn more here.