October 17, 2016, was the last day you can file California State or Federal income tax returns if you were granted the six-month extension in April. It is not the time to panic, but it is definitely time to move quickly if you have not completed your 2015 tax return and payment.
As long as you did so by October 17, you will be allowed to file electronically. However, if you are planning to file an amended return, you must mail it; neither the state nor the IRS allows electronic filing of amended returns.
Keep in mind that any unpaid taxes from 2015 have been accruing penalties and interest since April 18, 2016. You cannot file for another extension; you must file a return.
What Happens If You Do Not File
The consequences of not filing your state or federal income tax return extension or payment are more interest accrued and additional penalties.
For the IRS, interest on overdue tax compounds daily from the due date until the date of payment and is assessed at the federal short-term rate plus 3%.
You can be hit with multiple penalties as well, separate from interest. The IRS has two penalties:
- Failure to pay
- Failure to file
If you owe either of these penalties, pay the failure-to-file penalty first as it is the more substantial or the two. Failure to file is assessed at 5% of the taxes not paid by the due date for each month or partial month the return is late. Fortunately, it is capped at 25% of your taxes, but can still be a significant financial blow.
You get a small break if you owe both a failure-to-pay penalty and a failure-to-file as the failure-to-file penalty will be reduced by the amount of the failure-to-pay penalty.
Failure-to-pay is assessed at 0.5% of your unpaid taxes for each month, or partial month the tax is unpaid after the due date. This penalty also cannot exceed 25% of your taxes.
In the case of either penalty, if you can show the IRS reasonable cause for not filing promptly, you will not have to pay the penalty.
The California Franchise Tax Board, charged with administering income taxes for the state, can also assess penalties for these failures. For underpayment of taxes, the penalty is five percent of the unpaid tax plus 0.5% per month or partial month on the remaining amount due until it is paid off. The minimum penalty is $135.00 or 100% of the unpaid taxes, whichever is less.
You Missed the Deadline; Now What Do You Do?
The first thing to do is to file and pay your taxes as soon as possible, no matter how late.
If you are due a refund, there will be no penalty but if you owe the IRS and the State of California, penalties are assessed on all amounts due, so even if you are unable to pay, you should file to reduce the failure-to-file penalty.
Send a payment immediately to reduce the amount of interest that will accrue on the unpaid taxes. You will not be allowed to file for another extension so the tax return must be completed and filed quickly. Make sure you follow up with the IRS and the state tax agency to ensure the funds sent are matched to the correct tax documents.
Check your bank accounts to withdrawals and keep all canceled checks made out for taxes.
What to Do If You Cannot Pay
Even if you cannot pay, you must file a tax return to the IRS and the California Franchise Tax Board by the deadline, letting the agency know you are aware you owe taxes and you wish to resolve the situation. Then you can arrange to set up a payment plan for your tax bill with both agencies.
Tax agencies continue to assess interest and penalties until the full amount is paid; it is in your best interest to pay as much as possible up front and quickly. The IRS can file a Notice of Federal Tax Lien if you do not pay. A lien damages your credit rating, and you could face jail time.
The IRS also assesses penalties for underpayment that run from small fines to criminal charges:
- Civil or criminal fraud
- Frivolous return
More substantial fines or jail time may result.
If you took advantage of the six-month extension last April, be aware the deadline for filing federal and state income tax returns is October 17, 2016, just a few days from now.
If you can file and pay in full, do it now. If you cannot pay in full, file anyway and pay as much as you can. Then set up a payment plan for the rest as soon as possible. Filing or paying late simply results in penalties added to your tax bill and for every day you do not pay more interest is incurred.
Paying off your tax bill as soon as possible cannot be stressed strongly enough. Not only will you avoid additional interest and potential penalties such as liens, but you can also avoid damage to your credit rating and ability to obtain a loan.
Penalties for failing to pay or file may be waived if you can show the IRS and the FTB reasonable cause, examples of which include:
- Fire, casualty, natural disaster, or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation, or unavoidable absence of the taxpayer
Needless to say, you will be required to present documentation to support your claim.
An experienced tax attorney can help you determine the correct documentation to file and guide you to installment payment programs for both the IRS and the FTB, but you must act soon.
Just as a reminder, if you pay quarterly taxes, the next tax filing deadline for the IRS and the Franchise Tax Board is January 17, 2017, for fourth quarter estimated taxes for 2016.