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Tax return filing season lasts for just over 9 months for individuals and around 8 months for partnerships and corporations. You would think that would be more than enough time to gather last year’s data or do last year’s books and start filing taxes.
But some people find it impossible to get things done, even with that much time available. What are the consequences for procrastinating on filing your taxes?
Tax consequences of short-term procrastination
As an example, let’s look at the tax return of a woman named Nancy. Nancy’s tax return seemed pretty easy. In February, she brought everything to her enrolled agent (EA)—except her mortgage interest statement. April rolled around and Nancy wasn’t ready to file her taxes so she filed for an extension.
By late September, her EA was calling, emailing, and even sending her mail, begging her for that one missing document. Nancy didn’t have it, but she could have called up the lender, entered her loan number, pressed a key, and voila, she would have been given the amount over the phone in minutes. Unfortunately, she didn’t do this.
Nancy missed the deadline for filing taxes (October 15). She finally got her act together in December, but her EA was on vacation. When the EA returned, Nancy’s problem was not her priority. Nancy finally filed her taxes early the following February. It turned out that her mortgage interest was much less than she had figured, so she owed taxes—plus a penalty and interest.
Had Nancy filed by April 15, she would only have faced a small underpayment penalty. She had $1,000 due, but the underpayment penalty would only have been about $25. Filing late meant Nancy instead owed a 25 percent late-filing penalty, a 5 percent late-payment penalty, and interest at about 5 percent. With $1,000 due, Nancy had to pay an additional $300.
Tax consequences of filing at the last minute
When you’re trying to finish something right at last minute, mistakes can happen. There just isn’t time to do the proofreading necessary to ensure you’ve entered everything into your tax return properly. You also don’t have time to search out credits that you’re entitled to use, which means you’ll often shortchange yourself by hundreds—or thousands—of dollars. Sure, you can amend your tax returns later. But it’s expensive. And it takes about three to four months to get your refund.
Tax consequences of long-term procrastination
If notices from the IRS and/or the state are piling up, you’re probably afraid to open them. But when you get that scary registered letter, you’re going to know for sure that you’re in trouble.
The IRS and the state create substitute tax returns when you don’t prepare your own. They compute your balance due as single with no dependents and no deductions based on information they get from W-2s and 1099s. You end up with the highest taxes possible in this scenario. And if you do nothing, they will start impounding your bank account or attaching your wages or accounts receivable.
Perhaps you’re not really worried. You’ve always been paid on W-2s, with enough withholding. You probably have a tax refund coming to you. You figure you can file anytime.
Meet Stavros. An American pilot based in Europe, he has lots of withholding. He also tossed in an extra $10,000 or $20,000 each year with his extensions, but he didn’t file for over 10 years.
When he got around to filing, he was shocked. He was due over $100,000 worth of tax refunds, but he couldn’t get them. Why? The IRS won’t give you your tax refund if you file more than three years after the due date of your tax return.
So avoid the errors and the terrors of filing taxes late. Cure your procrastination. Put an appointment with yourself on your calendar, and just get your tax return done!
Money Management Tips: Storing Your Paperwork
Last-Minute Ideas for Saving Money on Your Taxes
Documenting Your Donations for Tax Deductions
Tax Deduction for Claiming Elderly Relatives and Dependents
Tax Tips: Tax Implications of a New Baby
Paying Taxes on Self-Employed or Side Income
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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