Even with a roughly two-month extension for filing 2020 tax returns this year, some people still couldn't meet the deadline. Filing taxes late has financial implications that you'll want to be aware of.
After all, the last thing you need is a surprise from the IRS, so it's best to be aware.
The implications of filing your taxes late
The IRS charges an interest rate of three percent plus the current federal interest rate for any outstanding payments. This doesn't include the penalties you'll receive. There's a separate late-filing and late-paying penalty.
The late-filing penalty amounts to five percent of your outstanding balance each month you stall your return. Completing your return now could mean limiting your late-filing penalties to five percent (any delay over 60 days requires a minimum $435 penalty), but waiting means you'll incur even more fees up to 25 percent.
As for late-paying penalties, you will be charged 0.5 percent of the unpaid balance monthly. Once you receive a final notice from the IRS before they issue levies or seize property, that rate jumps to one percent.
Aside from interest rates and penalties, other implications include the delay or potential loss of your tax refund, as well as the loss of your social security or disability benefit credits for the period when you didn't file taxes.
Is there any way to avoid penalties from filing your taxes late?
The IRS doesn't charge monetary penalties to those who don't owe taxes and are getting a refund. Of course, you need to be certain you're getting a refund in order to be sure you won't be penalized.
Otherwise, it's very rare that the IRS waves penalties for late filers. Viable excuses usually ring to the tune of natural disasters.
Even in a circumstance where you aren't charged penalties, you'll still have to pay interest.
Even if you're late, file your overdue tax return ASAP
The IRS says that you should file your late tax return as soon as possible, despite the fact that you're past the due date. This is because fees and penalties accrue over time, so the longer you wait, the longer you'll have to build up tax debt with the IRS, which isn't an ideal situation for anybody.
Also, you won't be able to claim your tax refund without filing your taxes. You have three years from the initial due date of the return to do so before you lose your opportunity to claim that refund.
You might not receive the social security or disability benefits from your non-filed income. Filing (even late) helps to protect those benefits. You will also protect your right to obtain loans since those who don't file taxes will experience loan approval delay.
Deadline for filing your state return
Most U.S. residents who file federal and state taxes late in 2021 will do so after May 17. However, residents of Iowa, Louisiana, and Maryland have until June to file their state taxes.