April 15 is a date almost everyone knows. It is the deadline to file your individual income tax return. But is April 15 the real deadline? You can always just file an extension and worry later, right? Not necessarily – as with most tax issues, the answer depends on the facts behind your individual situation. Let’s look at the real deal on deadlines and potential penalties.
Failure to File
The IRS gives taxpayers two basic filing choices. File by the regular deadline of April 15 or place your return on extension. An extension gives you up to six more months to file your tax return. For every month or portion of a month you file late, you will owe the IRS 5 percent of your net tax liability in penalties. Let’s look an example of how this works.
Suppose you fail to file an extension and do not file your return until Sept. 30. In the eyes of the IRS, you are six months late. Also assume the return you submit shows a total tax liability of $100,000 and that you already paid in $30,000 through withholding. This leaves you with a $70,000 net tax liability. Together, this leaves you with a calculated penalty of $21,000 (5 percent of $70,000 times the six months). The silver lining is that there is cap on the failure to file penalty of 25 percent of your total net tax, so you would actually only owe $17,500.
Failure to Pay
April 15 is not just a filing deadline; it is also a payment deadline. Contrary to what many people think, obtaining an extension on your tax return only extends the filing deadline – you still have to pay whatever tax you owe by April 15.
Failure to pay by this deadline will get you penalized at 0.5 percent per month of your net tax liability. The failure to pay penalty follows the same fractional month and 25 percent maximum penalty rules as the failure to file penalty discussed above. So failing to pay a net tax liability of $70,000 until Sept. 30 would result in a penalty of $2,100 (0.5 percent of $70,000 times the six months).
You can be subject to both penalties at the same time; however, the total penalty calculation is slightly different. The IRS caps the maximum monthly penalty at 5 percent. It does this by reducing the 5 percent failure to file penalty by the 0.5 percent failure to pay penalty for up to the first five months.
After the first five months, the failure to file penalty is deemed to have reached its maximum, but the failure to pay penalty keeps going. It can accrue until it adds another 22.5 percent in penalties at the 0.5 percent per month pace. In total, it is possible to face a maximum combined penalty of 47.5 percent of the net tax due. Obviously, the IRS is not to be ignored!
Is It Possible to Avoid Penalties?
Simply stated, the IRS does not care what is going on in your life. The deadline to file is the deadline to file, except in certain situations where a taxpayer can show reasonable cause for failure to file or pay. Here are a couple of examples of what the IRS considers reasonable cause:
- The death or grave illness of yourself or an immediate family in certain cases where it would prevent you from filing.
- If your tax records are unexpectedly destroyed by fire, flood, etc.
Proving reasonable cause as a defense against penalties is extremely difficult and burdensome, so it is best advised to not rely on these examples as a way out.