The IRS expects every taxpayer to file tax returns and pay their tax obligations in a timely manner. For most, this means by April 15. However, the amount owed can sometimes take you by surprise, and you may not have the necessary cash on hand to pay the full amount of tax by that deadline. The best thing that you can do is to file the return on time and pay what you can.
For example, assume you owe $1,000 on your 2019 tax return. If you file your tax return on time but pay what you owe after the due date or extended due date, you will owe a 0.5% failure-to-pay penalty on the liability for each month or part of a month it is due. If you are three months late with your payment you will owe a $15 penalty plus related interest.
What if you do not file or pay on time? The penalty is 5.5% per month or part of a month on the unpaid tax liability (5% late filing penalty plus 0.5% late payment penalty when both apply in the same month). If a return is filed more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $400 or 100% of the unpaid liability. In this case, the penalty owed for being three months late with filing and payment is $415 plus related interest. This is over 25 times higher than just a late payment penalty.
The above applies for individuals and C corporations. For flow-through business taxpayers there is also a penalty of over $200 per shareholder or partner per month for up to twelve months if the return is filed late.
An extension of time to file a tax return will help you avoid late filing penalties. Filing an extension does not grant an extension of time to pay. However, if 90% of the tax liability is paid by the time an extension is filed, and the remainder is paid by the extended due date, then the late payment penalty does not apply. Paying a portion of the tax liability by the due date reduces the amount on which late payment penalty applies, so this is beneficial to anyone who cannot pay 100% by April 15.
Filing a return late with complete payment of the tax liability yields no economic benefit or decrease in probability of an IRS audit compared to filing on time with an outstanding liability. Late filing penalties are much more severe than late payment penalties, and they should be avoided if at all possible.
If you need assistance, contact your Henry+Horne tax professional for more details.
Brandon Harbeke, CPA