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If you owe money, filing your taxes late will result in penalties added to your tax liability by the Internal Revenue Service. The penalties are based on how much you owe in taxes that year, so if you are entitled to a return, then there is no penalty for being late. You don’t owe any money to the government, so you cannot be charged for not paying them. A caveat here is if you fail to file and correspond with the IRS and it files a substitute return for you. A substitute return does not account for deductions to income that you would otherwise be able to use; therefore, you may end up with a tax liability after all if the amount of your eligible after-tax deductions exceeds your withholding amount. Otherwise, if you definitely owe taxes, the IRS will add three different penalties.
Failure-to-File Penalty
The penalty for failing to file on time is 5 percent of the balance you owe to the IRS for each month that passes after the April 15 deadline until you file the return. There is a maximum penalty of 25 percent of the balance after 5 months. Even though you will not be charged additional fees after 5 months for not filing, it is not wise to ignore the IRS because the government can charge you and jail you for as many years as you willfully avoid paying taxes.
Failure-to-Pay Penalty
The IRS will charge you an additional 0.5 percent of your tax balance for each month after the April 15 deadline. This balance offsets the failure-to-file penalty if you are assessed both penalties in the same month, so the total charge between the two penalties will equal 5 percent (4.5 percent for failure to file and 0.5 percent for failure to pay). Filing on time and paying late is highly recommended over filing late and paying late since the penalty is so much smaller.
Interest Penalty
A daily compounding interest charge of 3 percent (which is an effective annual rate of 3.045 percent) of your tax balance will be added to your penalties in addition to the failure-to-file and failure-to-pay penalties. This rate is for quarter 1 of 2011. The rate changes every 3 months.
Applying for an Extension
The IRS allows you three ways to request an additional 6 months to file your tax return: file Form 4868 electronically, file a paper Form 4868, or pay all or part of your estimated income tax due with a credit or debit card. To qualify for an extension, you must estimate your tax liability for 2010; record your estimate on Form 4868; and file it with the IRS, using either the electronic or paper form. There is no need to explain why the extension is necessary, and the IRS will let you know if your request is denied. Alternatively, you can call or use the website for one of the tax payment service providers and pay some or all of your estimated tax liability by credit or debit card to automatically apply for an extension. In all cases, the extension is strictly for the filing deadline. The failure to pay and interest penalties will be assessed if you do not pay on time.
