Should I File My Federal Individual Income Tax Return Even If I Have A Balance Due?

A common misperception for taxpayers is that by refraining from filing, they will buy themselves time to pay their taxes with the IRS. While this may have some truth to it, taxpayers that fail to file in a timely manner are exposing themselves to significant penalties. That exposure may not be worth the temporary reprieve that you may get from the IRS.

Taxpayers have a legal obligation to file and pay their individual income tax return by April 15th of each year. Internal Revenue Code (I.R.C.) §6012(a) and I.R.C. §6151. Taxpayers can elect to file an extension for filing that return, but that extension applies only to the legal obligation to file the return, the obligation to pay the taxes associated with that return can only be extended in limited circumstances and with a separate request. I.R.C. §6161 and I.R.C. §6081.

The failure to file penalty is significant. That is why timely filing a tax return, even if there is an outstanding balance, is so important. If a taxpayer fails to file their tax return in a timely fashion, the IRS can assess the failure to timely file penalty. I.R.C. §6651(a). That penalty is 5% of the outstanding tax due per month for each month that the return is filed late or 4.5% per month if the failure to file penalty is running simultaneously with the failure to pay penalty.

So, for taxpayers with a return due April 15th, failing to file by May 1st will expose them to a penalty as high as 10%. Even though a taxpayer was only a little more than two weeks late, the penalty is assessed for each month.

The failure to file penalty caps at 25% of the outstanding tax due, or 22.5% if running simultaneously with the failure to pay penalty. Furthermore, it is important to note that cap is met in 5 months, that puts a real premium on timely filing a return.

The above penalty is subject to abatement, if the taxpayer can demonstrate that reasonable cause exists as the basis for their failure to file. For more information on penalty abatement, please refer to these blog articles.