Monday, March 15, 2010

To Avoid Penalties, File even if You Don't Have the Money to Pay

The tax filing deadline for individual income taxes is approaching. If you don’t file your return and pay your tax by the due date you may have to pay penalties.

If you do not file by the deadline, you might face a failure-to-file penalty. In addition, if you do not pay by the due date, you could face a failure-to-pay penalty. Here are some things to know about the two different penalties you may face if you do not pay or file on time.

The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

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.

You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

Automatic six-month extensions are available for individual income tax returns. However, an extension is an extension to FILE, not an extension to PAY. Unless you pay at least 90 percent of your actual tax liability by the due date, you will be faced with a failure-to-pay penalty even if the remaining balance is paid by the extended due date.

So, it is always better to file your tax return by the due date or the extended due date, even if you don't have the funds to pay your taxes at the time of filing. Failure-to-pay penalties may be added, but you will avoid failure-to-file penalties.