Reduce Your Late Filing Penalty to the IRS

April 23, 2009  |   Posted by :   |   Personal Tax Advice,Tax Tips   |   Comments Off»

taxes Reduce Your Late Filing Penalty to the IRS

Filing Tax Returns Late can be very costly.

Let’s face it, filing your tax return is not the most exciting task you’ll do every year.  For many people, they would rather get a root canal than worry about their tax return.  Nevertheless, it’s something that must be done and putting off the filing process can be costly.  Every year, for various reasons, an estimated 7 million Americans fail to file their tax returns.

Why You Should File Your Late Tax Return As Soon as Possible
Reduce Your Late Filing Penalty to the IRS

Be filing your return sooner than later, you’ll reduce the late fees imposed by the IRS.

NOTE: It’s important to realize that the IRS penalty for filing a late tax return is much different than the penalty for making a late payment.

The IRS penalty rate for late filing, without reasonable cause,  is 5% of the net tax due for each month the return is late, with a maximum of 25%.  The IRS Penalty for making a late payment is only .5% (1/2 of 1%) on the net amount of tax due with a maximum of 25%. If the IRS believes you have filed a fraudulent return, the penalty is even steeper.  The monthly penalty for filing fraudulently is 15% per month of the net tax due with a maximum penalty of 75%.

In summary, the fee for filing your taxes late is 10 times more costly than the late payment fee.  It’s obviously a smart idea to at least file and pay a late fee than to avoid filing your return altogether.

  • IRS Late Filing Fee: Monthly penalty of 5% of net tax due (up to 25%)
  • IRS Late Payment Fee: Monthly penalty of .5% (1/2 of 1%) of net tax due (up to 25%) plus interest on the amount owed.
    The IRS offers installment agreements when the situation is warranted.
  • IRS Fraudulent File Fee:  Monthly penalty of 15% of net tax due (up to 75%)

If you do not owe money, there are no late fees but after 3 years you’ll lose any refunds you would’ve been entitled to.  In addition, why let the IRS sit on the money they owe you?  A new client came to us after receiving an IRS notices demanding over 10 years of tax returns.   After we prepared the returns for this new client, he did not owe the IRS any money as per the notices, however, he lost over $40,000 in tax refunds he would have been entitled to.  We were only able to recover for him about $10,000 for the last three years.

If you owe the IRS money, they can go back forever to collect the money.

If you are self employed, and have not filed your return, you will not receive credits toward Social Security retirement or disability benefits.  If you are self employed, we highly recommend creating a Corporation,  S-Corp or LLC depending on your circumstances.

If you are late in filing your 2008 tax return (after April 15th, 2009) and did not file an extension, we highly recommend you contact a certified public accountant as soon as possible.  If you did file an extension (form 4868) , you’ll have until October 15th, 2009 to file the return.  You are still subject to late payment penalties.  Under certain circumstances, if the payment has not been made, the IRS could possibly void the extension and you would be subject to late filing penalties too.

How does the IRS know if you evade filing?
The IRS often finds tax evaders when ex-friends, spouses, disgruntled employess or other “enemies” decide to rat you out among other things including reports they receive.

Will you go to jail if you don’t file?
The IRS does not recommend criminal prosecution of individuals for failing to file their tax returns, assuming you voluntarily file or make arrangements to file, before a criminal investigation.  Flat out avoiding to file year after year is a different story,  just ask Wesley Snipes or Al Capone.  You do not need to worry about prosecution, as long as you make an honest effort to file a correct return and have legal income.  The long term plan of the IRS is to get American citizens back in the system and not prosecute people who just made an honest mistake.

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