Note: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
If you miss the annual deadline for filing your income taxes, you don’t necessarily need to panic. That’s because missing the annual tax filing deadline may not mean a big penalty, and you may have more options than you think.
Every year, during the week leading up to the traditional April 15 tax-filing deadline, people used to crowd the post office to be sure to get their returns in on time. Since then, more people have switched to electronic filing for their tax returns.
Of course, in 2020, things changed even more. First, no one wanted to be part of a crowd, and second, the Internal Revenue Service extended the tax-filing deadline for all Americans to July 15.
But the deadline is set for April 15 in 2021, and in the years to come. The penalties for missing the deadline in one way or another can be significant. Those penalties may increase over time, leading to a much higher tax bill. And steps like filing for an extension can help give you more time to get your filing right, but can create its own set of problems.
Related: IRS changes for 2020 taxes
What Are the Missed Deadline Penalties?
For individuals, the IRS can levy penalties for a few infractions related to the April 15 tax filing deadline.
It can penalize a taxpayer for “failure to file,” which is when a person fails to file their tax return April 15, or by the date specified if the person requests and receives an extension. The minimum penalty for not filing a tax return is $435, for 2020.
But the penalty for failing to file can be much higher. The IRS can levy a penalty of 5% of the taxes owed per month for each month that the taxes are owed after the April 15 filing deadline passes. That means, if a taxpayer owes the IRS $10,000 for a given year of income, and misses the deadline, they’ll owe an extra $500 as of May 15, another $1,000 the month after that, and so on, for up to five months.
Another infraction is “failure to pay,” when a taxpayer doesn’t pay the money they owe on their tax return, even if they file by April 15. The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. That may not sound like much, but it’s due every single month, until the tax is paid in full. And that penalty can be as much as 25% of the overdue taxes.
The IRS can also penalize taxpayers for failing to pay estimated taxes over the course of a year, or if their check to the government bounces.
How Do Extensions Work?
There are years when completing your taxes by April 15 is just too much to accomplish. Preparing a tax return isn’t always simple. As a taxpayer’s financial life evolves, it can be quite complex and time-consuming. And even if you use a professional tax-preparer, April can be an extremely hectic time for them, and they may not be able to fit you in before the 15th.
That’s where an extension may come in handy. The way to get one is to file a Form 4868, which is an application for permission to take an extra six months to file your taxes. Taxpayers, however, can’t be late when requesting the extension. They have to submit the form by April 15th.
But an extension isn’t a magic bullet. A taxpayer still has to send the IRS a check for their estimated taxes by April 15.
If a taxpayer takes another month to file the complete return, and they owe more than they estimated on Form 4868 on April 15, they may face penalties for the shortfall. And those penalties will grow with each month they take to file, even with the extension. If they overestimate the taxes they owe, pay too much on the April 15 deadline, then they’ll receive a return after they eventually file.
What Deadlines Mean If You’re Owed Money
All of this discussion about deadlines and penalties ignores the question of what all of this means to a taxpayer who expects to get money back from the government in the form of a tax refund.
A tax refund happens when a taxpayer overpays their taxes over the course of a year, whether through their regular paycheck deductions, quarterly payments or other means. When they file their return, it’s a chance to get that money back. Tax refunds are quite common — 46% of people expected tax refunds of more than $1,000 in 2020, according to a recent CreditKarma survey. And 44% of the people polled for that survey said that their tax refund is the biggest single payment they receive in a given year.
All of the deadlines and penalties described so far apply to anyone who owes money to the IRS in a given year. For taxpayers who are owed money by the government, the rules are different.
The annual tax filing deadlines have a different significance for people who will receive a refund check from the IRS. For these taxpayers, there’s a real incentive to file taxes ahead of the deadline. The reason is simple: The sooner you file, the sooner you’re likely to receive your refund. The IRS has publicly stated that it issues roughly 90% of its refunds in under three weeks, though it warns that some returns require additional review, and may take longer as a result.
But there’s also a risk in forgetting to file a tax return, even for people who can expect a refund. After four years, the IRS will no longer pay that money. The good news is that there is no late-filing fee for taxpayers who file returns requesting a refund from prior years. And a taxpayer can go back three years when requesting a refund. For example, if a person wants to claim a 2017 tax refund, they can file a claim until the 2021 tax deadline.
It may seem unlikely that people would leave money unclaimed. But in 2020, the IRS announced that it had more than $1.5 billion in unclaimed income tax refunds from roughly 1.4 million individual taxpayers who never got around to filing their 2016 federal income tax returns. And when the tax filing deadline passed in 2020, those people lost their ability to ever get that money back.
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