Imagine what your tax debt will look like when you add in penalties and interest, which will accrue until you resolve the situation.
And only by filing will you be able to take advantage of one of several relief options on offer, and either avoid some penalties and interest or at least minimize them.
File no matter what
For most people, tax returns are due May 17 this year. If you don't think you'll be able to make that deadline, file for an automatic extension, which will give you until October 15. The form to get that extension is on the IRS website and you also can request the extension via the IRS Free File program.
(Those who live in federally declared disaster areas from the winter storms in February have until June 15 to file their returns.)
If you don't meet your filing deadline and you owe money, you will be charged a failure-to-file penalty. The penalty is 5% a month on the unpaid amount up to 25%. If your return is 60 days late, the minimum penalty will be either $435 or the amount of tax you owe, whichever is smaller.
But you will avoid that penalty if you simply file on time, even if you can't pay what's owed.
"This is one of the most misunderstood aspects of filing returns and paying taxes. Anecdotally, too many people believe the best course of action is to wait to file until they have the money," said Eric Smith, an IRS spokesman.
Other penalties you may face
Tax penalties come in many flavors, too many to list here.
But in addition to the failure to file penalty, here are two other common ones:
Underpayment penalty: Even if you file on time you still may be charged an underpayment penalty if you failed to pay 90% of what you owe for tax year 2020 or 100% of the tax owed for the prior year, whichever is smaller.
This penalty especially can affect those paying estimated taxes -- such as the self-employed -- if they miss the mark in one or more of their quarterly payments. And it may affect some who regularly have tax withheld from their paychecks but also have outside sources of income, such as capital gains or a side hustle.
To minimize this penalty, Smith said, pay at least a portion of what you owe before your filing deadline, because the underpayment penalty is based on the number of days from the payment due date.
Failure to pay penalty: For each month or part of a month your remaining taxes aren't paid from the due date of your return, you will be charged a 0.5% penalty on the unpaid amount. This is in addition to interest charges on the unpaid amount.
How to get penalty relief
Doing nothing to resolve your outstanding tax debt will cost you serious money in penalties and interest. But there are ways to reduce the hit if you take action.
If you can't file on time but have a reasonable explanation as to why and have evidence to back it up, include that explanation with your return. The person reviewing it may be able to waive or reduce the failure-to-file penalty.
If you have a great track record of filing and paying on time, you may qualify for first-time penalty relief.
If you expect to be hit by the underpayment penalty and your income varied greatly throughout the year, you may qualify for the annualized income exception that can reduce or eliminate the penalty, Smith said.
If you can't pay now but you know you'll be able to pay your tax debt eventually, file on time and set up a payment plan with the IRS.
"Although the late-payment penalty will continue to accrue on the unpaid balance, it will grow at half the normal rate. Usually, that penalty accrues at the monthly rate of 0.5%. But if a payment plan is in effect, that accrual rate drops to 0.25% per month. That doesn't sound like much of a difference, but over several months, or even a year or two -- it mounts up," Smith said.
If you don't expect you'll ever be able to clear your tax debt, you might be able to set up an offer in compromise with the IRS, in which you agree to pay a lesser amount than is owed in a reasonable period of time.
Or if the IRS determines you will only be able to pay once your financial situation improves, it may temporarily delay the collection process for you, but penalties and interest will continue to accrue during that period of delay.
Securing penalty relief can get complicated -- and expensive since there are fees charged for some options. So if you know of a reputable, highly accredited tax lawyer or enrolled agent who can help you navigate your options, their fees may end up being cost effective if they can secure the best deal given your situation.
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Tax penalties: Here's what to do if you can't pay your taxes this year - CNN
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