For millions of American taxpayers, Oct. 15 is as important a date as April 15, the traditional deadline to file income taxes. The Internal Revenue Service routinely grants requests to file a late return, and the due date for those returns is Oct. 15. Here are five things you need to know about filing income taxes late.
1. It can be expensive
Taxpayers who missed the pandemic-delayed May 17 federal income tax filing deadline can be hit with two penalties: one for filing late and another for paying late. The penalty for late filing is 5 percent of the amount due each month, and the failure to pay is 0.5 percent a month, and maxes out at 25 percent, says IRS spokesman Eric Smith. (When both penalties are levied in the same month, the total penalty is 5 percent a month: 4.5 percent for failure to file and 0.5 percent for failure to pay.)
Interest also accrues, at a current rate of 3 percent. “The late-payment penalty rises with each month that goes by, and interest is calculated based on the number of days and is indeed compounded daily,” Smith says.
2. It can be avoided
You could have dodged the late filing penalty by requesting an automatic extension by the federal tax filing deadline, which is traditionally April 15. The extension would have pushed your filing deadline to Oct. 15. The IRS requires late filers to pay the taxes they owe by the earlier filing deadline. Otherwise, you’d still be liable for the late payment penalty.
In a typical year, more than 15 million taxpayers request automatic filing extensions, according to the IRS. But extensions declined during the pandemic to 12 million in 2020 and 14 million this year, likely because the regular filing deadline was pushed back to July 15 in 2020 and May 17 in 2021.
People requesting extensions often have more complicated returns, and may need to wait for a Schedule K-1 for certain investments, as one example, according to Bill McDevitt, shareholder at WilkinGuttenplan, an accounting firm with offices in New Jersey and New York.
“Most folks who have relatively simple returns do their best to file by April 15,” McDevitt says. “Oftentimes, it could be any number of reasons why you need to ask for an extension. But when you do ask for an extension, you have to have an idea of what your liability is and make sure the tax is paid by April 15."
People who asked for an extension should file on or before Oct. 15 to avoid the penalty for filing late. If you are getting a refund and file late, the IRS won’t levy a penalty. But don’t wait too long — you will lose your refund if you don’t claim it within three years. The safest and fastest way to get a refund, the IRS says, is to file electronically and choose direct deposit for payment. You can even choose to deposit the refund in up to three accounts. Electronic filing options, such as IRS Free File, remain available.
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3. You may have even more time
There may be some relief if you have special circumstances forcing you to file or pay late. The penalties, but not the interest, may be abated “on reasonable cause grounds,” according to Smith. “Usually, this involves sending us a written explanation of your situation. These are evaluated on a case-by-case basis,” he says.
The IRS First-Time Abatement program, to seek relief from penalties, is an option for people who have a good record of filing and paying on time. “I know that the IRS is willing to work with you in that way,” says Lisa Greene-Lewis, a CPA and TurboTax blog editor. Two groups of taxpayers can file after Oct. 15 without risking a penalty. Military members and others serving in a combat zone typically have 180 days after they leave the combat zone to file returns and pay any taxes due. The second group includes taxpayers in federally declared disaster areas who already had valid extensions to Oct. 15 and now may be eligible to file even later.
“This has been a very challenging year for disasters,” Smith says. “We don’t have an estimate of the number of filers impacted, but it’s also worth noting that additional areas may still be added between now and Oct. 15. That’s because we follow FEMA’s lead, so if there are any additional disaster declarations, based on storms, fires, etc., that have already occurred, that will have an impact."
Extension deadlines vary from Nov. 1 to Jan. 3 for taxpayers in disaster areas declared by the Federal Emergency Management Agency (FEMA). The FEMA designation covers all of Louisiana and Mississippi as well as parts of New York (including New York City), New Jersey, Pennsylvania (including the Philadelphia area), California, Michigan (including Detroit), North Carolina and Tennessee. Affected taxpayers should visit the IRS “Tax Relief in Disaster Situations” web page for more information.
McDevitt’s firm had clients affected by Hurricane Ida’s severe flooding in parts of New Jersey. McDevitt says taxpayers who were affected should note “FEMA disaster relief” at the top of their returns. There also may be an extension for people who live outside the FEMA zones if their accountant is located in a federally designated disaster area and suffered an impact such as losing records in a flood, according to McDevitt. These filers should seek guidance from their tax preparer and the IRS, he says.
4. You could get a tax break
Besides avoiding penalties for late filing, taxpayers with extensions may have another reason to get their returns in by Oct. 15, according to Greene-Lewis. If the taxpayer is eligible for the child tax credit, filing the 2020 return will give the IRS up-to-date information and could demonstrate the filer is eligible for advance payments on the credit, Greene-Lewis notes.
Unlike a tax deduction, which reduces your taxable income, a tax credit reduces your tax payments dollar for dollar. The revamped child tax credit for 2021 is more generous than in previous years, expands eligibility and establishes partial distribution through advance payments of up to $300 a month per eligible child, which started July 15. (Eligible families claiming the credit will receive a total $3,000 per qualifying child ages 6 through 17 and $3,600 per qualifying child under age 6.) The child tax credit is also fully refundable, which means taxpayers can receive the entire credit even if they don't have earned income or don't owe any income taxes.
5. It never hurts to ask for help
If you want to hire a tax preparer, it is important to book the CPA or accountant soon, McDevitt says. “Tax preparers are getting busier and busier. And it's more and more difficult for them to take new clients on, the later the tax season comes along,” he says. “The earlier you get to them, the better, even if you don't have all your information.” He recommends giving the tax preparer all the info you have so far and getting in their lineup, and then providing the outstanding records as soon as possible.
If you need assistance and have a basic return, the IRS Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs offer free basic tax return preparation to qualified individuals. If you'd like to give tax help, consider volunteering for AARP's Tax-Aide program.
Sharon Waters, a former CPA, has written for Wired.com and other publications.