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File Your Return Even If You Can’t Pay!

April 16, 2012

As April 17, 2012 approaches; tax day for the 2011 Individual Income Tax, the question becomes, “file or don’t file my return?” Setting aside tax protest issues – sternly addressed by courts, this question often arises when a taxpayer does not have the money to pay their tax bill. This inability to pay is never acceptable to the IRS as “reasonable cause” not to file your return.

Failing to file your return on time results in some serious penalties and interest on any tax due. The “failure to file penalty” is 5% per month on the tax due, capped at 25% of the tax due. There is also interest charged each month on the tax due – and the penalty. Additionally, the interest never caps and continues to accrue until full payment is made.

In addition to the “failure to file” penalties and interest, there are “failure to pay” penalties and interest. The failure to pay penalty is much lower than the failure to file. The failure to pay penalty is ½% of the amount due, per month – again capping at 25% of the tax due. Interest is still charged on the tax and penalty.

It should be noted, that failure to file can also be a criminal matter under federal tax law.

If tax reports like W-2s or 1099’s have been sent to the IRS, the service may prepare a substitute tax return for you. This return will not take into account deductions you may be entitled to, or marital status, credits, etc. This could then result in an even more extensive battle with the IRS when you do try to correct the situation.

In the end, file your returns even if you cannot yet pay. You will potentially save quite a bit in interest and penalties, and you will eliminate some worry about criminal prosecution. Additionally, the IRS has assistance programs available for taxpayers who cannot afford to make timely payments but these require a filed return.

(Much like the IRS, the New York Department of Taxation and Finance penalizes for the same “infractions.” However, there is no cap on the New York Penalties.)