The Internal Revenue Service faces problems if people don’t file their income taxes on time, skip the extension request, file after the extension deadline, or don’t file their tax returns at all.
That’s not surprising, and the IRS has taken a serious “failure to file” penalty to highlight its complaint. It’s 5% of unpaid taxes for each month, making it more expensive than a “failure to pay” penalty. The IRS also charges interest on penalties.
But here’s a pleasant surprise: The IRS is giving late taxpayers a break by not filing the penalty on their returns for the 2019 and 2020 tax years.
Taxpayers and the IRS were at war with each other for the devastation in the early stages of the epidemic. IRS and Treasury officials have pushed back the filing of 2019 tax returns from April 15, 2020, to July 15. Next year, move the 2020 tax deadline to May 17, 2021. It’s also a way for the IRS to focus on solving problems. Backlog in the tax return process.
The best news for the recently announced penalty exemption? In many cases, people do not need to do anything to get relief.
The IRS said it will pay assessed penalties to about 1.6 million taxpayers, estimating a $1.2 billion refund to those who paid the penalties. Most of these payments will be made by the end of September, the tax agency said.
By dividing the number of eligible taxpayers by the total, the average payment would be $750. But actual payments vary widely, depending on the amount of tax owed and how late the taxpayer was before filing.
There’s more good news, but with a catch that’s fast approaching: Anyone who hasn’t filed returns from those years can avoid a penalty by filing a return by Sept. 30, the tax agency said. But the opportunity to skip the penalty will disappear after that day.
Most people who are eligible for relief filed their tax returns long ago. But that small final window is still worth it for those who haven’t signed up.
“It’s a real benefit, and the first thing, the most important thing, is filing returns,” said Tom Osaben, director of tax content and government relations at the National Association of Tax Professionals.
Osaben has seen the results in his own tax practice. The IRS recently issued a $69 refund for one of its clients’ 2019 returns. (Osaben does not hold a late return on the matter.)
There are two reasons why punitive damages can help. At a time when costs are high and still rising, every extra buck helps. Additionally, the Sept. 30 deadline is a red letter reminder of another upcoming tax deadline, Oct. 17.
If people get an extension, that’s when they have to file their 2021 income tax returns penalty-free. The IRS estimates that 19 million taxpayers requested more time to file their federal income tax returns this year.
After Oct. 17, everyone who didn’t act on the soon-to-be-closed temporary moratorium for the two early tax returners may be facing non-filing penalties.
Remember what the punishment is and is not – abandonment
The IRS is granting relief on non-filing penalties, but not using the relief on non-payment of penalties. Each penalty is up to 25% of the unpaid tax, but the filing penalty adds up to more money and faster. That’s why tax experts always recommend that taxpayers still file their returns or at least file an extension during tax season to avoid the penalty.
According to H&R Block HRB, the highest rate of default and penalties is 47.5%.
Remember, the IRS can work out half-assets on unpaid tax liabilities or “offers in reconciliation,” when taxpayers say they can’t pay the full amount of tax owed but can settle for a smaller amount. “The IRS is very willing to work with taxpayers once a return is filed,” Osaben said.
If taxpayers still have unpaid tax debts between penalties, Osaben said, the proceeds from the penalties will first be applied to the amount owed before any check arrives.
Also remember, if taxpayers receive a refund, the IRS notes that a penalty cannot be filed. But people only have three years from the date of original submission to claim the refund. After that, it’s government money.
As a general matter, eligible taxpayers should expect a paper check for a penalty-related payment, said IRS spokesman Eric Smith. Around that time or before, Smith said they should expect a written notice from the tax agency about the action.
“This penalty relief will be automatic for qualified individuals or businesses. No need to call,” IRS Commissioner Charles Rettig said when the IRS announced the release last month.
Also read: Yellen: IRS will beef up customer service hotlines for tax season as it has $80B from the Depreciation Act.
The penalty settlements allow the IRS to focus its employees on eliminating backlogs, the agency said. As of early September, the IRS had 7.2 million unprocessed individual tax returns.
People who have not yet entered
Move faster and file electronically instead of mailing a paper return, Osaben said.
In fact, the same advice to move quickly and avoid paper returns applies to taxpayers who still haven’t filed their 2021 tax returns and are due by the Oct. 17 deadline, he noted.
The IRS goes through a lot of paperwork. Of the 7.2 million tax returns awaiting IRS review, about 5.6 million are unprocessed paper returns.
Don’t wait for those yet to file 2021 returns, the IRS has been saying for months. “If a taxpayer has all the necessary information to file an accurate return, they can file electronically any time before the October deadline and avoid the last-minute rush,” the agency said earlier this summer.