One’s inability to pay taxes is not tax evasion. People fear that if they can’t afford to pay their taxes, they have committed a criminal offense and are subject to criminal prosecution. This is not the case.
It is best to contact a certified public accountant for guidance.
This article will focus on the civil penalties for failing to file and pay taxes on time.
Failure To Timely File And Pay Your Taxes
The most common tax penalties result from people who fail to timely file and pay their taxes. The failure to timely file penalty may be imposed if your tax return is not filed on or before the due date (including validly filed extensions) for filing the tax return. Your tax return is timely filed if it is mailed on or before the due date of the tax return.
IRS Penalties For Failing To Timely File And Pay Their Taxes:
- The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.
- If both a Failure to File and a Failure to Pay Penalty is applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.
- If after five months you still haven’t paid, the Failure to File Penalty will max out, but the Failure to Pay Penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.
- If your return was over 60 days late, the minimum Failure to File Penalty is $435 (for tax returns required to be filed in 2020, 2021, and 2022) or 100% of the tax required to be shown on the return, whichever is less. Please See IRS.Gov
Case example of failing to file tax returns
About five years ago, my business failed, and I lost everything. Because it was my own business, I did not qualify to collect unemployment. I have been looking for a full-time job ever since but without luck. About two years ago, I was evicted – I couldn’t even afford the cheapest rent – which caused me to rely on the good nature of family and friends. Some people called this couch surfing, but it felt more like homelessness to me.
This type of situation is not uncommon
Financial trouble almost always has a way of begetting more financial trouble. The economic result is the poor tend to remain poor while the wealthy maintain and grow their wealth.
The trickle-down economic policies of the ruling elite took an unexpected turn when the Covid-19 Pandemic forced the government to provide wide financial assistance to the general population by extending tax relief and unemployment benefits.
However, the legal obligation to timely file tax returns, irrespective of one’s ability to pay what’s owed, did not change.
Filing Tax Returns Is Mandatory
According to state and federal tax agencies, all individual taxpayers must file their tax returns or file for an extension on or before the filing deadline. Your current financial situation is not particularly relevant to your legal obligation to timely file your tax returns every year.
Failure to timely one’s income tax return can result in having your bank account levied by the government. In the case example described above, the tax authority may have moved against this person’s bank account prematurely. Usually, the taxpayer will be required to prepare and file their tax returns for those three missing years.
In most cases, once the returns are filed and assuming no taxes are due, the levy and garnishment will be recalled, and the money is refunded to the taxpayer.
The case example above does not qualify as a criminal offense. The general practice for failing to file your tax returns will typically only result in civil penalties, which may be waived depending on the circumstances.
In the case example above, the best possible alternative was to contact the Taxpayers Advocacy Office. They usually charge nothing for their services and can be quite effective, especially if the taxpayer is going through financial hardship.
Even if you cannot pay your tax, you must still file your return before the filing deadline lapse
A timely filing will at least eliminate the late filing penalty. Many people cannot file their returns due to circumstances beyond their control.
If you can show that your failure to file was due to “reasonable cause” rather than willful neglect or negligence, you will likely be able to convince the IRS to waive the penalty.
Reasonable Cause Standard
Remember that the Internal Revenue Service treats a returned check as nonpayment. The exact “reasonable cause” standards apply to reducing the failure to pay the penalty and the failure to file the penalty.
When to pay delinquency tax penalties
If you are subject to one of the delinquency tax penalties, you can either calculate and pay the fine with your tax return – or wait for the Internal Revenue Service to assess the penalty and send you a notice for payment.
Should you be self-employed, the IRS will require you to make estimated quarterly payments.
Failing To Pay Estimated Taxes
The internal revenue service wants you to pay estimated taxes on an as-you-go basis. If you receive wages, taxes are normally withheld by your employer as the wages are earned unless you file and declare that you are exempt from paying estimated taxes.
However, for other types of income – such as self-employment income, interest, dividends, capital gains, etc. – there is no employer to withhold taxes.
Notwithstanding, the internal revenue service still wants to collect their taxes. Thus, your tax expert will likely recommend that you make “estimated tax payments” or be subject to estimated tax penalties for these types of income.
Estimated taxes are usually required in four equal installments, payable on April 15, June 15, September 15, and January 15.
Calculation of Estimated Tax Penalty
Calculating the penalty is based on the IRS underpayment interest rate times your estimated tax underpayment.
You generally can avoid estimated tax penalties if any of the following exceptions apply:
- You did not have any prior-year tax liability
- Your tax due is less than $1,000
- You pay either through withholding (from your job with an employer who withholds taxes from your salary) or through timely estimates, either 100% of your prior year’s tax or 90% of your current year’s tax. However, if your income is more than $150,000, your estimated tax payments must be at least 110% of your prior year’s tax.
IRS Payment Policy Strictly Enforced
Absent extreme circumstances, the IRS expects you to file on a timely basis. To show “reasonable cause,” you must furnish the IRS with a written statement setting out the grounds of your claim.
The statement must contain a declaration signed under penalty of perjury and filed with the Internal Revenue Service office where the late return is filed. Failure to timely pay the penalty is calculated at .5% (one-half of 1%) per month of the net tax required to be shown on your return, to a maximum of 25% of the net tax due.
The failure to file and failure to pay penalties do not run together
Thus, if you both fail to file and fail to pay the tax due, the maximum penalty to be applied will be 5% per month until the complete 25% Failure to File Penalty is reached, and then .5% after that – until the combined total reaches 47.5% of the net tax due.
Tax Settlement Services
Not everyone can or wants to negotiate with an IRS agent. In fact, most tax experts advise against it. You will be in a much better position if you have a CPA or Certified Tax Specialist to assist you. If this is not a financially viable option, consider using the Taxpayers Advocacy Office.
