Don’t want to file your taxes? Get ready to pay … a lot
NEW YORK (CNNMoney) — Looking for ways to cut your tax bill? Here’s an easy one: Just file your federal tax return by April 15.
Really. That’s it.
If you expect to owe money to the IRS, and you either don’t want to or just can’t afford to write that check by the deadline, file your 1040 anyway. Or at least file for an automatic six-month extension.
Otherwise, you will end up paying a failure-to-file penalty worth up to 25% of what you owe in the first place.
And that’s before counting the failure-to-pay penalty and interest.
Both penalties would kick in on April 16.
For the first year, the biggest hit to your wallet will be that failure-to-file penalty, which amounts to 5% of the tax owed every month — or part of a month — for five months, capping out at 25%.
The failure-to-pay penalty is also capped at 25% of the tax you owe, but it accrues more slowly — at 0.5% a month for 50 months.
But when both penalties apply in the same month, the combined maximum will be 5%, instead of 5.5%.
Former IRS attorneys Deborah and Garrett Gregory, co-authors of the upcoming book “An Insider’s Guide to Fighting the IRS,” crunched some numbers to show just how expensive sticking your head in the sand can be.
Say you owe an additional $5,000 on your 2014 tax return. But you don’t get around to filing that return until Jan. 1, 2016 — eight-and-a-half months after the deadline.
You’ll ring in the new year owing an additional $1,125 in failure-to-file penalties alone.
On top of that, you would owe $225 for failure-to-pay penalties, plus $133 in interest.
Your grand total: $6,483, or 30% more than you owed in the first place.
If you had just filed on April 15 and not paid a dime, your additional cost would have been well below 10% of your actual tax debt.
If your original debt was $10,000, you’d end up owing $2,250 in failure-to-file penalties, $450 in failure-to-pay penalties and $266 in interest. Total: $12,996.
Maybe filing in 2016 feels rushed to you. So you wait until early 2017, more than a year-and-a-half after the filing deadline. Now you’d owe nearly $14,000 on your original $10,000 debt.
Depending on where you live, that spare $4,000 could easily fund a mortgage payment and a nice weekend away with your better half. Instead it will just be logged on some bureaucratic greenshade’s past-due list.
If you do apply for a 6-month extension, and if you have already paid 90% of the taxes you owed for the year by April 15, you can avoid late payment penalties but you will still owe interest on your remaining tax debt.
The only way to steer clear of that is to actually pay what you owe by April 15.
Of course, like a lot of Americans, you may not expect to owe any more money on April 15 or may even be due a refund. Filing may be a pain, but do it anyway. Or at least file for an extension.
Why? First, let’s say your assumption that you won’t owe anything is wrong and it turns out you do owe money. If you don’t file, you’ll get hit with all of the above penalties plus interest.
Second, even if you’re right and you’re owed a refund, if you wait too long to file, you may lose it.
“You have 3 years to claim that refund. So you have to file your 2014 income tax return by April 15, 2018 or else you will be ‘time barred’ from claiming your refund,” the Gregorys noted.