Monday, April 28, 2014

Late Lateef: The Story Of Filing Late Returns & Penalties!

"Late Lateef" is a term used very often in the Indian sub-continent for those who are habitually late! When thinking of this post, I was curious if would oblige me with a story or two about how this term originated. Sure enough, as soon as I hit the "I am feeling lucky" button, I had various versions on hand; if you feel curious, do check out one version here

But, we are not here to talk about folklore & it's origins, although it is more interesting any day than penalties for late filing and/or failure to file. Today is April 28th 2014, tax deadline was 2 weeks back & if you are one of those like Late Lateef and did not file your tax return, then you need to read this post!! If late Lateef was due a refund, he would not be penalized for late filing BUT would only have 3 years from the due date of the original tax return to claim his refund. 

We talk today of those who owe taxes to the government and did not file on time. There are 2 penalties that may apply: the first is failure-to-file, for late filing and the second is failure-to-pay, for late payment. 

Failure-To-File Penalty:  
  • This is usually 5% of the unpaid taxes for each month or part of the month the tax return is not filed/ is late. 
  • It cannot exceed 25% of one's unpaid taxes. 
  • If the tax return is more than 60 days late from the due date, the minimum penalty is $135 or 100% of the unpaid tax. 

Failure-To-Pay Penalty: 
  • This is usually 0.5% per month of one's unpaid taxes. 
  • It applies for each month or part of a month the taxes were due & starts accruing the day after the taxes were due. 
  • It can be as much as 25% of one's unpaid taxes.   

If like Rip Van Winkle here, you had your smart tax professional (ahem, ahem), file an extension (to file a tax return) by April 15th, you should have paid in at least 90% of taxes owed with your extension to avoid a failure-to-file penalty. Any balance on the taxes owed has to be paid by the extended due date, usually October 15th. {Note: This is only for penalties owed, you will still owe interest on the unpaid taxes from the due date.} 

If in any month, both the (0.5%) failure-to-pay and (5%) failure-to-file penalties apply, then the maximum penalty amount charged for that month is 5%. 
One can request abatement of penalties if there exists a reasonable cause for not filing or paying on time. 
Even if you cannot pay the taxes owed, you should file a tax return.  There are various payment options available to pay off taxes owed to IRS. The IRS will work with you to resolve payment of debt through an Installment Plan that takes into account how much you can afford to pay off every month. If this is your situation, please consult an Enrolled Agent to help you set it up. 

Bibliography: IRS Tax Topic 653; IRS Tax Tip 2014-56; IRS Tax Tip 2014-58; Online Payment Agreement

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website,