What Happens If You File Taxes Late + Tips to Reduce Penalties

Filing taxes accurately and on time can be a daunting task, and it's not uncommon for small businesses to miss a deadline. Whether due to procrastination, lack of organization, or simply being unaware of the deadline, late tax filing can lead to a variety of problems, from fines to increased IRS scrutiny.  

In this blog post, we will discuss the implications of filing late taxes and what you can do to mitigate the damage. 

Consequences of Filing Late Taxes

Filing your taxes late isn't usually the end of the world, but you should know the potential consequences your small business might face. The IRS can be lenient if this is a first-time offense or a rare occurrence, but repeat offenders aren't typically as fortunate. 

Penalties and Interest

A significant consequence of filing your taxes late is the potential for penalties and interest. The IRS imposes a failure-to-file penalty, which is typically 5% of the unpaid tax balance for each month your tax return is late, up to a maximum of 25%. Additionally, if you owe taxes and fail to pay by the deadline, you'll face a failure-to-pay penalty of 0.5% per month on the unpaid balance, up to a maximum of 25%.

The IRS also charges interest on the unpaid tax balance on top of these penalties. The interest rate is determined quarterly and is currently set at 3% per year, compounded daily.

Reduced Refund or Increased Tax Liability

If you're entitled to a tax refund, filing late can delay processing. In some cases, late filing can even result in a reduced refund due to penalties and interest. Conversely, if you owe taxes, filing late can lead to increased tax liability as penalties and interest accumulate.

Loss of Tax Benefits

Certain tax benefits, such as the Earned Income Tax Credit or the Child Tax Credit, may be reduced or lost if you file your taxes late. Additionally, if you're self-employed and fail to file your taxes on time, you could lose your ability to claim certain self-employed tax deductions, such as the home office deduction or the deduction for self-employed health insurance premiums.

Difficulty Obtaining Loans or Credit

Lenders and creditors often require copies of your tax returns when evaluating your creditworthiness for loans, mortgages, or lines of credit. If you haven't filed your taxes on time, this can create difficulties in obtaining financing, as lenders might view late tax filing as a sign of financial irresponsibility.

IRS Collection Actions

In extreme cases, the IRS may take collection actions against taxpayers who fail to file their taxes or pay the tax they owe. These actions include garnishing wages, seizing bank accounts, or placing a tax lien on your property.

Strategies to Reduce the IRS Late Filing Penalty

The consequences of filing late are wide-ranging and intimidating, but they all have one thing in common: the quicker you address the penalties and consequences, the better. Use the following strategies to promote a speedy resolution to your late filing issues. 

File Your Taxes as Soon as Possible

If you've missed the tax filing deadline, you must file your business taxes as soon as possible to avoid the penalties and interest from accumulating. The IRS will generally work with taxpayers who try to correct their late filing status.

Request an Extension

If you cannot file your taxes by the deadline, you can file a tax extension by submitting Form 4868. This will give you an additional six months to file your tax return. Small business owners must remember that an extension only applies to the filing deadline, not the payment deadline. You'll still need to pay any taxes owed by the original due date to avoid the failure-to-pay penalty and interest charges from piling up. Learn more about the benefits of filing a tax extension.

Set Up a Payment Plan

If you cannot pay the tax you owe in full, you can apply for an installment agreement with the IRS. This allows you to make monthly payments on your tax liability over an extended period. While this won't eliminate penalties and interest, it can make the debt manageable and prevent more severe collection actions.

How 1-800Accountant Can Help Your Small Business 

Late tax filing can result in penalties, interest, and additional complications for your small business. You can avoid unpleasantries and ensure your taxes are filed accurately and on time by partnering with the business tax experts at 1-800Accountant, America's leading virtual accounting firm for small businesses.

Our team of experienced Enrolled Agents (EAs), Certified Public Accountants (CPAs), and other tax professionals stay on top of the latest tax laws, regulations, and strategies impacting your business. This allows us to keep you compliant, maximize your deductions, and minimize your tax liability.

Whether it's small business taxes, tax advisory, or any of our professional accounting services, we have the solution you need at a price that works for you. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.