President Obama signed into law, on February 24, 2016, an increase in penalty for not filing your income tax return. The law is in effect for the 2015 tax year, meaning it applies when you file your return this tax season. The law also put a ban on taxing Internet services.
The actual penalty that you are charged for not filing your taxes is 5-percent of the taxes owed each month that the tax return is late. This amount can be a maximum of 25-percent. The cost of failure-to-file is now set at $205 or 100 percent of the amount of owed tax.
As with any law, there is a small loophole with this one. If you have proof that your failure-to-file was for unforeseen circumstances, or a verifiable and valid reason, you may be able to have the fees and penalties waived. This process is more stressful than going through an audit.
Taxpayer language confusion
Taxpayers often confuse tax-related language. It can be difficult to understand. There is a failure-to-file penalty and a failure-to-pay penalty. These are very different. The failure-to-pay consequences are easier to overcome than not filing at all.
What taxpayers fail to understand is that they can be at fault and subject to both penalties. The failure-to-pay penalty is 0.5-percent of the amount owed each month. It can maximize at 25-percent of the tax amount due. As both penalties come into play, the failure-to-file penalty is reduced by 0.5-percent to make up for the additional penalty.
Underpayment of tax
When you are self-employed, you must pay estimated income taxes, or self-employment taxes. If you have not estimated properly and owe more than you’ve paid in, you can be penalized. This also applies to persons that have not had enough tax withheld from paychecks throughout the year.
If you are able to do so, as a self-employed person, pay an additional amount of tax to decrease next year’s tax liability. Paying 110-percent of what you paid this year is a good way to ensure that you are not underpaying, and may, in fact be due a tax refund.
Interest and fees
Interest is handled a bit differently with non-payment and non-filers. When you owe the federal government or fail to file a tax return, you are charged interest from the date it is owed until a payment is received. If you do not pay the entire amount due, you will incur interest and administrative fees with each and every payment made until the tax debt is satisfied in full. Interest adds up quickly with tax debt, it is best to pay the full balance when possible.
To avoid these penalties and fees, it is better to file for an extension than not file at all. In the end, not filing will cost you far more. When you file for an extension, you are not charged any fees or interest as long as your tax return is submitted before the end of the 6-month extension. In 2016, the extension period ends on October 18th.
When you utilize TurboTax to file your taxes you simplify your tax filing. All you have to do is answer some simple questions and they will fill in the forms for you in addition to computing your taxes. Taxpayers know that TurboTax is their key to receiving their largest refund possible.