Beware of IRS Penalties
Hard to believe that May is here. Although the deadline for filing the 2020 tax return has been extended to May 17, 2021, it is important that you file your return on time since failure to do so will trigger a late filing penalty.
The penalty for late filing a tax return is 5% of the amount of tax shown on the return. The penalty is assessed for each month, or part of a month, the return is late. Hence, even if the return is only a few days late, a full month’s penalty will be assessed. The penalty will be imposed for a maximum of 5 months (25%). In the event the return is filed more than 60 days late, the IRS will impose a minimum failure to file penalty of the lesser of 100% of the tax shown to be due on the return or $435. If the IRS determines that the failure to file the return was fraudulent, the failure to file penalty is increased to 15% per month up to a maximum of 75%.
The failure to file penalty can be avoided by either timely filing the tax return or requesting an extension of time to file the tax return by May 17, 2021. If the extension is timely requested, the IRS will automatically grant an extension of time to file the income tax return until October 15, 2021. An extension for filing the tax return is obtained by filing IRS Form 4868. This form can be filed electronically.
Note that the extension of time to file a tax return is not an extension of time to pay any tax which may be due on the return. If the taxes due for the year are not paid by May 17, 2021, a failure to pay penalty will be imposed. This penalty is .005% (1/2 of 1%) of the tax due for each month, or part of a month, the tax is not paid. The failure to pay penalty will increase to 1% per month if a notice of levy is issued. A full month’s penalty for failure to pay is charged even if the payment is made within the month. The maximum amount of the failure to pay penalty is 25%.
To avoid the failure to pay penalty any tax shown to be due on the return must be paid by May 17, 2021. If an extension of time to file the return is requested, the amount of tax which will be due must be estimated. Any amount of tax that will be due when the return is filed must be paid with the request for the extension of time to file or by May 17, 2021, whichever is later. If the return is filed any time after May 17, 2021 and a tax is shown to be due, the failure to pay penalty will be imposed beginning on May 18, 2021 until paid the tax is paid in full.
In the event both the failure to file and the failure to pay penalties apply in a particular month, the failure to file penalty will be reduced by the failure to pay penalty for that month. Hence, when both the failure to file and the failure to pay penalties apply the maximum penalty that will be imposed by the IRS is 47.5%.
Penalties are not the only charges the IRS will impose if a return is not timely filed or taxes not timely paid. The IRS will assess interest on taxes, penalties and interest due. The interest accumulates daily and does not stop accruing until the balance is paid in full. Interest on the failure to file penalty begins to accrue on the due date of the return. Interest on the failure to pay penalty begins to accrue on the notice date of the penalty amount. The interest rate charged by the IRS is determined quarterly, however, any changes to the rate are prospective only. The interest rate for the second quarter of 2021 is 3%.
The IRS’s penalties and interest accrue quickly. In our voluntary tax reporting system, penalties serve as an incentive to file and pay taxes on a timely basis. Now is the time to make sure your return, or an extension filing request, are timely filed and that your tax payments throughout 2021 were sufficient to avoid any unpleasant surprises.