Eight Facts on Late Filing and Late Payment Penalties

Larry Villano, Publisher of Loopholelewy.com

Here are eight important points about penalties for filing or paying late:

  1. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.
  2. The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.
  3. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
  4. If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.
  5. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.
  6. If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.
  7. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  8. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

There are some golden nuggets in the tax code. Here's the rundown on the five tax-advantaged items the get preferential or favorable treatment:

  1. Tax-Free Income: This is income where the law provides a hand-off policy. You can receive this type of income without current or future tax worries. It comes in the form of exclusions or exemptions from tax. Some tax-free items don't even have to be reported on your tax return.
  2. Tax-Deferred Income: This is income where the taxes on current income don't have to be paid until some time in the future. A traditional IRA is a good example of tax-deferred income where you don't pay tax on your contributions or the accumulation of income, you only pay taxes when the funds are distributed to you at some future date.
  3. Tax-Credits: These are items you can use to reduce your income dollar-for-dollar. There are two types of tax credits, (1) non-refundable credits, which may be used to reduce your tax liability dollar-for-dollar but not below zero, and (2) refundable credits, which also reduce your tax liability dollar-for-dollar, but if the credit is greater than your tax liability, the excess credit is refunded to you. The earned-income credit is an example of a refundable credit.
  4. Deductions: A deduction is subtracted from your income and serves to reduce the amount of income subject to tax. There are two kinds of deductions, (1) above the line deductions, which are subtracted from your gross income. A list of these deductions are indicated on page 1 of Form 1040, toward the lower part of the form, and (2) below the line deductions, which may only be claimed on Schedule A if you itemize your deductions.
  5. Capital Gains and Ordinary Dividends: Gains on the sale of capital assets, such as stocks and bonds, held over one year are taxed at the lower capital gain rates. Net section 1231 gains on the sale of business property (which are non-capital assets) held more than one year get special tax treatment. Although section 1231 assets are non-capital assets, section 1231 gains are taxed as long-term capital gains. Ordinary dividends on stocks and capital gain distributions from stock mutual funds are taxed at the same low rates as long-term capital gains.