Tax day 2020 is July 15, which is just 2 days away!
If you’re feeling tempted to blow off your 2019 tax filing, let us convince you why it’s a better idea to go ahead and file.
You might get a refund, with interest!
Sometimes people are afraid they’re going to owe money to the IRS, but when they do the calculations required to file, they find out that the numbers work out in their favor. This is one of the best reasons to go ahead and file. Make sure you take advantage of any credits you are eligible for, such as the Earned Income Credit, the Child Credit, or others.
This year, you might even get a bonus interest payment with your refund, because the IRS is paying up to 5% interest on 2019 refunds issued after April 15.
Failure-to-pay Penalty
Avoiding filing because you can’t afford to pay the taxes you owe is a bad idea. The IRS will start adding penalties and interest to unpaid tax balances on July 16, 2020. This means if you do not pay all of the taxes you owe in full by July 15, you could face a failure-to-pay penalty of ½ of 1% of your unpaid taxes. That penalty applies for each month or part of a month starting on July 16, 2020.
It’s best to file your return, pay as much as you can, and set up a payment plan with the IRS.
If you pay at least 90% of the taxes you owe by July 15 and request an extension, you may be able to avoid the failure-to-pay penalty. In that case, you must pay any remaining balance by the extension date of October 15.
Failure-to-file Penalty
Most people know that the IRS has penalty fees for not paying on time, but did you know there is also a separate fee for not filing?
The penalty for filing late is normally 5% of the unpaid taxes for each month or part of a month that a tax return is late, up to 25% of your unpaid taxes.
The failure-to-file penalty will also start accruing on July 16, 2020.
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% of the unpaid tax.
If both the 5% failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5%.
These charges rack up the longer the debt goes unpaid, so even if you can’t afford to pay the taxes you owe, make sure you file to avoid this additional charge.
Tax Liens
If you become very delinquent on your taxes the IRS can place a federal tax lien on your assets.
A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt.
The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.
This means you can lose your wages, your investments, your car, or even your house if you owe taxes to the IRS.
Do not put yourself in this position. File, pay what you can, and arrange a payment plan with the IRS.
Extension
If you need more time to complete your filing, the best thing to do is request an extension from the IRS. This will give you until October 15, 2020 to file.
Remember however, that if you owe money, it is still due July 15 even if you request an extension to October 15. The extension only gives you extra time to file, not to pay. This means that your balance due will accrue penalties and interest starting on July 16.
It’s best to make an estimate of the amount of money you owe, and go ahead and make a payment with your extension request. This is the best way to avoid penalties and interest charges.
If you overpay on July 15, you can get the overpayment back as a refund. This is preferable than having to pay a higher amount because of penalties and interest.
Payment Plans
If you owe money in taxes, you can arrange a payment plan with the IRS. They will work with you to allow you to pay your balance due over time. Remember, however, that penalties and interest will begin to accrue on any unpaid balances as of July 16, 2020.
The IRS offers 3 options if you can’t pay your balance in full:
Monthly Installments
With this option, you agree to pay a specific amount each month, for a set number of months until your balance is paid in full. You need to fill out an application with the IRS and sign an Installment Agreement.
Offer in Compromise
This is a way to settle your tax debt for less than the full amount due. You offer the IRS what you can pay (less than the full balance). The IRS will consider your offer, and either accept or reject it. They will consider your unique set of circumstances, including your ability to pay, your income, your expenses, and your asset equity.
In order to be eligible for Offer in Compromise, you must be current on estimated tax payments and you must not be in an open bankruptcy proceeding.
There is an application fee of $205 to apply for Offer in Compromise.
Temporary Delay of Collection
If the IRS determines that you can’t pay any of your tax debt, they can report your account currently not collectible and temporarily delay collection until your financial condition improves.
Being currently not collectible does not mean the debt goes away, it means the IRS has determined you cannot afford to pay the debt at this time.
Prior to approving your request to delay collection, the IRS may ask you to complete a Collection Information Statement and provide proof of your financial status. This may include information about your assets and your monthly income and expenses. They may also file a Notice of Federal Tax Lien to protect the government’s interest in your assets.
If the IRS delays collecting from you, your debt will increase because penalties and interest are charged until you pay the full amount.
Unclaimed 2016 Refunds
July 15, 2020 is also the deadline for taxpayers who didn’t file a 2016 return but are owed a refund.
Taxpayers have three years to claim a refund, by law. This means July 15, 2020 is the last day Americans may recover money the IRS owes them for the 2016 tax year.
According to the IRS, there is approximately $1.5 billion in unclaimed federal income tax refunds to taxpayers who didn’t file in 2016.
There is no penalty for filing late when the IRS owes you a refund, so it is definitely worth filing if you didn’t file in 2016 and are expecting a refund.
Tax Planning for 2020 and Beyond
Tax Planning is important to make sure you don’t get into a situation where you owe the IRS a lot of money and you don’t have the money to pay the taxes you owe.
BNC Tax can help you with tax planning for 2020 and beyond, as well as requesting payment plans or Offer in Compromise from the IRS.
Schedule an appointment with us to discuss your personal situation and create your tax plan.