As the April 15th deadline approaches, we felt it would be a good time to discuss the IRS penalties for late filing and what one can do to avoid them. The penalties being discussed are all regarding individual tax returns. We will write a post at a later date discussing business return penalties.
Late Filing Penalty– Individual Income Tax Returns
What it is: Any return that is filed past the due date (without an extension) is subject to a 5% penalty for any portion of a month that the return is late. This penalty is capped at 25% of the unpaid balance. This penalty is the most costly of the deadline related penalties and it is the most avoidable.
Extension: A timely filed extension grants the taxpayer an additional 6 months to file. However, this does not extend the payment due date. If a return is filed past the extended due date of October 15th the penalties are computed on the balance owed without regard to the extension. This means the penalty calculation would begin April 15th.
How to avoid: In order to avoid this late filing penalty, a taxpayer must file a return or extension by April 15th. If a taxpayer owes tax and is unable to pay, it is still far better to file and pay late than not file on time. In this case, the taxpayer would still incur late payment penalties but would avoid the costly late filing penalty.
In a nutshell, all individual taxpayers with a filing requirement should file either a return or extension by April 15th. Once a return is extended, make sure the return is filed prior to the extended due date.
Ryan Stone has been an Enrolled Agent (EA) for 3 years and has worked in the accounting industry for 5 years. He specializes in individual and small business taxes plus tax mitigation.