It seems hard to believe that April is here. This means that the deadline to file your income tax return is nearing. This year the last date to file your income tax return is April 18, 2023. Failure to file a timely return can subject you to a late filing penalty.

WHEN IS THE FAILURE TO FILE PENALTY IMPOSED?

If the income tax return is not filed by the due date of 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. If an extension to file the return is filed with the IRS by April 18, 2023, the due of the return will be extended to October 16, 2023 and no penalty will be imposed if the return is filed by the extended due date.

HOW CAN I AVOID A LATE FILING PENALTY?

If you believe that you will not be able to file your return by April 18, 2023, the easiest way to avoid the late filing penalty is to request an extension of time to file your return. The IRS will automatically grant you an extension of time to file your income tax return until October 16, 2023 if the request to extend is filed with the IRS by April 18, 2023.  An extension for filing the tax return is obtained by filing IRS Form 4868. If the request to extend the due date is filed late, the late filing penalty will not be avoided.

HOW MUCH IS THE LATE FILING PENALTY?

The penalty for late filing a tax return is 5% of the amount of tax required to be shown on the return reduced by any taxes paid through withholding or estimated payments and by any credits to which the taxpayer is entitled. 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 $450.

If the IRS determines that the failure to timely file the return was fraudulent, the failure to file penalty is increased to 15% per month up to a maximum of 75%.

WHAT IF I OWE TAXES, BUT FILED A TIMELY EXTENSION OF TIME TO FILE THE RETURN?

It is important to understand that the extension of time to file a tax return is not an extension of time to pay any tax which may be due. If you do not pay any taxes you may owe by April 18, 2023, you will incur a failure to pay penalty.

The failure to pay penalty is .005% (1/2 of 1%) of the unpaid tax. The penalty is imposed for each month, or part of a month, the tax is not paid. Like the failure to file penalty, a full month’s penalty is charged even if the payment is made within the month.

The .005% failure to pay penalty rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return on time and enter into an installment agreement to pay the tax due on the return, the failure to pay penalty decreases to ¼ of 1% while the agreement is in effect. The maximum amount of the failure to pay penalty that can be imposed is 25% of the unpaid tax.

WHAT IF A RETURN IS NOT TIMELY FILED AND A TAX IS OWED ON THE RETURN?

If a return is filed late and the tax is not fully paid, you will incur both the failure to file penalty and the failure to file penalty with 25% caps for each penalty. If 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. Once the failure to file penalty reaches the 25% maximum, that penalty will no longer be assessed, but the failure to pay penalty will continue to accrue until it reaches the 25% maximum.

DOES THE IRS IMPOSE INTEREST ON PENALTIES?

The IRS will assess interest on the failure to file penalty and the failure to pay penalty. The interest accumulates daily and does not stop accruing until the balance is paid in full. The interest rate charged by the IRS is determined quarterly. The IRS’s interest rate for the second quarter of 2023 is 7%.

The IRS’s penalties and interest accrue very quickly. Now is the time to make sure your return, or the request for filing an extension, are timely filed so that you will not be subject to the failure to file penalty. In addition, the tax liability for the year must be estimated and any tax which may be due must be paid by April 18, 2023 in order to avoid the failure to pay penalty.