Question: Should I file my taxes if I can’t pay?

Answer: Yes!  This is a question that that I’m always asked around tax season and the tax extension deadlines.

Putting aside that it is a misdemeanor to fail to file a tax return and a felony for the willful failure to file a tax return, it can be financially devastating to not file on time.

One of the biggest IRS penalties is the failure to file a tax return by its due date plus extensions.  The failure to file penalty runs at 5% per month up to maximum of 25% of the total tax due.  For example, if the tax return is reporting a balance $100,000.00 and its five months late, the IRS will assess an additional $25,000.00 in tax penalties.  Therefore, by filing the return timely, you would avoid criminal exposure and the costly failure to file penalty.

In addition to the failure to file penalty, the IRS would assess the failure to pay penalty on the amount owed plus statutory interest.  The failure to pay penalty is assessed at .5% per month up to a maximum of 25% for the late payment of tax.  The failure to file penalty is reduced by the failure to pay penalty when both penalties run concurrently.  If the government issues a notice of intent to levy and you do not pay within 10 days from the notice, then the penalty increases to 1% per month.  Therefore, if you have any money available, even if the amount is less than what is reported, then submit the funds with your tax return.  That way, you reduce the exposure to the failure to pay penalty which is based on the amount of back taxes owed.

In addition to the tax penalties and the taxes owed, the IRS assesses statutory interest on both the tax reported and the tax penalties assessed.  In the aggregate, penalties and interest could inflate your back taxes by 55%-75%.  Therefore, by timely filing and paying what you can, you can significantly reduce the amount of back taxes owed.

The disadvantage of filing a tax return without payment is that the IRS collection cycle will begin.  However, if you are proactive, you can negotiate for additional time to pay taxes, request an IRS payment plan, place your account in forbearance (i.e. currently not collectible, CNC, or Status 53), apply to settle your tax debt for less than what is owed (i.e. offer in compromise or OIC), or propose to the IRS another alternative that would resolve your back taxes.

Related Posts

Leave a comment