Did you remember to file your taxes for 2015? The due date to file your return and pay your bill was back in April, unless you filed for an extension to file. If that was the case, you still were to pay at least 90 percent of your estimated tax bill in April and submit your return in October. Unless you arranged something else with the IRS, you are on borrowed time. The moment your return and/or payment was late, you started to owe penalty fees and interest. However, paying your taxes before the close of the year can help you lower your tax debt significantly.
Penalty Fees Quickly Add Up
Penalty fees quickly add up. If you do not file, you start to owe an additional 5 percent of your total tax per month or partial month for which you are late. For example, if you owe just $100, that is $5 added to your tax debt. That does not seem like much, but when you look at a tax bill of $1,000, all of a sudden that is an additional $50 each month. Just imagine how much it will be if you owe a significant amount of money in taxes!
It will not exceed 25 percent of your total tax, which gives you 5 months straight of steep penalty fees for not filing. However, if you go beyond 60 days without failing to file, then you also will have a minimum penalty of $135 or 100 percent of your unpaid tax. What this tells you is that the sooner you file, the less money you will owe in penalty fees.
The same goes for failure to pay, except that penalty fee is just 0.5 percent per month. It also caps out at 25 percent, which gives you 50 months until it caps out. This again might not sound like much, but if you owe $1,000 in taxes, then that is $5 per month. That adds on $250 to your bill if you make it to the maximum of 25 percent.
If you do not file and do not pay, then you will have a maximum of 5 percent per month, and that caps out at 47.5 percent of the tax you pay. That could be as much as $475 added onto your tax bill if you owe just $1,000. If you owe more money, then that will go up exponentially. That is just in penalty fees. You also will be charged interest, which is about 3 percent currently but changes every three months. By taking action now, you could save yourself a lot of money simply by stopping the steep penalty fees, especially those for not filing your tax return.
Do You Even Owe Money?
Another reason to go ahead and file your tax return before the end of the year: you might not even owe money. Once you fill out your 2015 tax return, you might be happy to find that you get a refund! If you wait and continue to not file, you might have to give up that refund. You only have three years in which you can file and receive the refund. Plus, the IRS will eventually file for you using something known as a substitute for return. When they do this, they only use the information they have on file. This does not include any credits and deductions for which you might be eligible beyond the standard deduction. Typically, this leads people to owe significantly more than they should.
By filing a return by the end of the year, even if you cannot pay or are late in filing, you could reduce your overall tax debt by as much as 90 percent. You will be able to include any deductions and credits and avoid the IRS using a substitute for return. If you are owed a refund, then you do not face any penalties or interest, and you will get your refund in time to help pay off any debt you might accrue over the winter holiday shopping season.
Pay What You Can and Negotiate
Even if you cannot pay what you owe, always pay what you can and go ahead and file, even if you have not already, by the end of the year. The more you pay upfront, the better situation you will be in. If you are able to pay 90 percent of your tax, you might even not face any penalty fees.
If you cannot pay your tax bill, then negotiate with the IRS. There are some IRS tax relief programs in place to help you out. The easiest one to get is an Installment Agreement. This lets you pay your tax bill over time without the steep penalty fees you get if you do not file or do not pay. You still pay interest and a 0.25 penalty fee, but you will still end up paying much less than if you simply did not pay during this time.
You might also be able to apply for a penalty abatement, especially if you have a reason for being late in filing and/or paying your taxes this year. In some situations, you might also be eligible for an Offer in Compromise or Innocent Spouse Relief. Taking action now, before the end of the year, could help you to save money in the long run. You also will not have to worry about collective action.
Take Action on All Your Back Taxes
Taking action before the end of the year stops much of the penalty accruing on the 2015 tax returns, but that does not mean you should sit on any of your older tax returns. The sooner you take action, the better it is for you. If you are within the three years, you might find that you actually should get a refund rather than owe money due to filing a return in place of a substitute for return. Even if you are past that date or owe money, you can still take action by filing for one of the tax relief programs. This will help you pay off your tax debt and get compliance.
Working with a tax professional can help you to figure out the right course of action to take. Do not delay any longer. Call Fidelity Tax Relief today to talk about your situation with one of our tax experts and start the new year with a fresh start.