Earlier in the year, you realized that you would not be able to file your tax returns by the standard tax filing deadline.
So, you made the right move:
Filing for an automatic six-month extension (Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return).
This form pushes the deadline to file your taxes on or around October 15th.
But what happens if you’ve properly filed an extension but can’t file or forget to file by October 15th?
Here’s what you need to know:
If You Don’t File by October 15th and You’re Owed a Refund
In one case, nothing bad will happen if you don’t file your individual tax return by October 15th.
The truth is:
People who will get tax refunds don’t have to worry about filing by the April 15th or extended October 15th deadline, either.
The federal government has no problem with you lending them money.
That said, you should file your tax return as soon as possible to claim your tax refund.
After all, why would you want to loan your money to the government for free?
You must file your return within three (3) years to claim your refund.
If you don’t, your refund may be permanently turned over to the US Treasury.
If You Don’t File by October 15th and You Owe Money
Unfortunately, life isn’t as simple for those that don’t file on time and owe money.
You’ll likely owe interest and penalties on any unpaid amount.
We’ll cover the penalties in detail in a minute, but here’s what else you need to know.
What the IRS knows
Despite the fact that you didn’t tell the IRS about your tax situation by filing a tax return, the IRS still knows quite a bit about what you likely owe taxes on.
Most tax forms you receive are sent to the IRS, as well.
For instance, W-2s for wages, 1099s for other income and other forms that report income are sent to both you and the IRS.
Some deduction related tax forms, such as Form 1098 for mortgage interest, are sent to the IRS, too.
Unfortunately, most of the information about the deductions you may qualify for aren’t sent to the IRS. Instead, information on most deductions is up to you to track and report.
The IRS can use the information they know about to complete a tax return substitute on your behalf.
This allows them to determine how much money they think you owe. This is rarely good news for you.
They often use this information to start the collections process.
Even worse, the IRS will typically only include income information on your substitute tax return. They won’t include any credit or deductions you may qualify for.
This means the substitute tax return results could end up with a higher amount owed than you would have owed if you filed a tax return.
Thankfully, once you receive notice that the IRS has calculated how much you owe using a substitute tax return, they give you an option to file your own tax return.
Filing your own return allows you to include all deductions and credits you’re owed to potentially lower your tax bill.
If you receive a notice about the IRS creating a substitute return, make sure to file your tax return promptly.
Do not dodge the notices
If you ignore these notices, things can turn from bad to worse.
The IRS can file a notice of federal tax lien, serve you with a notice of levy or offset the amounts you owe from any refunds you’re owed.
A federal tax lien is extremely serious. It gives legal claim to your property, including property you acquire after the lien arises. The IRS may file this lien in public records, too.
IRS levies shouldn’t be ignored, either.
Essentially, the IRS can seize your assets including wages, bank accounts, social security benefits, and retirement income.
They can also go after your property including automobiles, boats, RVs and real estate. The IRS will then sell the property to work toward satisfying the debt you owe.
If you’re self-employed, you could also be missing out on future social security benefits, too. The IRS will not report self-employment income to the Social Security Administration unless you file a return.
By ignoring a substitute tax return, the income won’t be reported on your social security earnings statement and won’t be included in the calculations for your social security benefits.
Important Things to Know If You Miss the Deadline
First, it’s important to remember that just because you file an extension to file your return doesn’t mean you have an extension to pay the money you owe.
You’re required to estimate and pay the amount you think you owe when you file your extension.
If you don’t, you’ll end up paying interest and penalties for late payment.
Interest is calculated by using the federal short-term interest rate plus three percent. It is compounded daily. The penalties portion is a little more complicated.
The IRS states:
The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by April 17, 2018.
It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%.
If you owe a decent amount, this penalty could add up quickly.
The late payment penalty isn’t the only penalty you need to worry about. The late filing penalty is much steeper. You’ll have to pay 5% of the amount due for each month or partial month your return is late.
The maximum penalty is 25% for this penalty, as well.
However, the minimum penalty is $210 or the balance of the tax owed, whichever is smaller, if your return is 61 or more days late.
You may be able to avoid the filing penalty if you have a reasonable explanation for filing late.
You must attach a statement to your return explaining your reason for filing late in an attempt to get this penalty waived.
Steps to Take After You Miss the Extended Deadline
After missing the tax deadline, you should file your tax return as soon as possible.
The IRS allows you to file your past due return in the same way that you would file an on-time return.
If you’re able to pay the amount owed, you’ll stop the interest and penalties you owe from increasing.
While the interest and penalties listed above may not seem like a huge deal, they can add up over time.
Even if you aren’t able to pay the amount you owe, you should file your return as soon as possible.
Filing will at least stop the late filing penalty from continuing to increase.
Online payment agreements
You can request additional time to pay using the IRS’s Online Payment Agreement application if you’ll be able to pay what you owe in the next 60 to 120 days.
There are no setup fees if you use this option.
Penalties and interest will continue to accrue until what you owe is paid in full.
Not everyone can afford to pay what they owe within 60 to 120 days, though.
You can set up longer-term payment plans, called installment agreements.
Set up fees range from $31 to $225 depending on how you apply, how much you earn and whether you pay by direct debit.
Like with online payment agreements, you’ll still have to pay accrued penalties and interest until you pay the balance in full.
Offer in compromise
Some people can’t even afford to pay what they owe over long periods of time.
In these cases, you may want to consider looking into the IRS’s offer in compromise program.
If accepted, an offer in compromise allows you to settle the taxes you owe for less than the full amount you owe.
The IRS will consider your income, expenses, equity in assets you own and your ability to pay when looking at your offer in compromise.
The IRS specifically states:
We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.
In order to move forward with the offer in compromise program, you must have filed all current tax returns and met all payment requirements.
You do not qualify if you’re in the middle of an open bankruptcy proceeding.
To see if you qualify, you can use this IRS pre-qualifier tool.
Don’t wait, file now
While ignoring the situation and hoping it will go away seems like the easy path, it will likely hurt you the most.
Remember, the IRS receives most tax forms you receive and will eventually figure out if you owe them money.
Go ahead and figure out how to file your tax return as early as possible. If you need to, hire a professional to help.
If you can’t afford to hire a professional, consider seeking out help from free tax assistance programs such as the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs.