Many taxpayers who wait to file their returns until after the deadline risk incurring penalties and interest charges on top of their tax bills.
In this article we'll explore what happens when taxpayers don't file their returns on time as well as how much these penalties and interest rates can cost them over time. With some planning ahead you can avoid these pitfalls and penalties.
It's time to start thinking about your tax return! Tax season is right around the corner, if you haven't already started planning, now's the time.
Your tax return for the year 2022 is due April 18, 2023.
If you file a tax extension, your deadline is extended to October 16, 2023. That gives you more time to gather the information you need and get everything together for your tax return.
If you do choose to file an extension, keep in mind that it only extends the time to submit your tax forms—not the payment you might owe.
If you file your taxes late, you'll be charged a failure to file penalty. The penalty is charged on returns filed after the due date or extended due date, absent a reasonable cause for filing late.
If you file your taxes late, you'll be charged a penalty. The amount of that penalty depends on how late your return is filed and how much tax you owe.
There are two kinds of penalties for filing your taxes late—one for filing late and one for paying late.
The penalty for filing taxes late is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%. At most, each of these penalties will be 25% of the total tax you owe.
The IRS will charge you the 5% for failure to file for five months until that total penalty reaches 25% of the unpaid tax amount. The IRS will continue to charge you the 0.5% failure-to-pay minimum penalty for 45 months until it also maxes out at 25% of the unpaid total.
The late filing penalty applies to the tax that remains unpaid after the due date. Unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits.
Recommended reading: Don't File Taxes For Your Business? Here's What Could Happen
If you're wondering how to avoid an IRS penalty for late filing, here are some tips:
The best way to avoid a penalty is to file your taxes as soon as possible. We recommend you contact your accountant immediately so they can file your taxes as early as possible, which will help minimize any penalties that might be applied by the IRS. The failure to pay penalty is generally much smaller than the penalty for missing the filing deadline. File your income tax return on time and avoid the larger of the two penalties.
If you’re sure you can’t make the tax deadline, file an extension. You can do this by filing Form 4868. This will give you until October 16, 2023 to file.
As a business owner, there are many things to consider when it comes to taxes. One thing is for sure, you’ll save yourself time and money if you hire a professional to help with your taxes.
A tax professional can help you avoid costly mistakes that may result in penalties or even jail time. They also know how to use deductions that could save you thousands of dollars on your taxes—and that’s just the beginning.
Tax professionals are able to see big picture trends so they can advise their clients on how best to plan for future tax seasons and make sure their companies stay compliant with all current regulations.
For the past 5 years, Club Capital has helped insurance agents better manage their agency's finances through best-in-class monthly accounting, CFO, and tax services. Schedule a demo today!