[Updated April 27th, 2021]
Yes…we just received another gift from Congress. We now have until May 17th to file our taxes, file an Extension, AND make a payment without penalty. However, if you can’t pay your taxes there are still some very important steps you need to take to minimize the damage- filing an Extension is one of them!
First, be aware there is a Late Payment Penalty (more on this below) that kicks in if we don’t pay our taxes for the prior year by May 17th this year. However, the penalties for ‘Not Filing’ are far worse than for ‘Not paying’.
Thus, you can AVOID the Failure to File Penalty easily by simply filing an Extension. You now have until October 15th, 2021 to figure out a plan to pay AND file.
But remember, Filing an Extension (Form 4868) …is ONLY an ex extension to ‘file’, and IS NOT an extension to pay. Also, an Extension doesn’t help you after October 15th. Read more in my article: “What to Do if I Can’t Pay My Taxes by October 15th”.
So…what to do if you can’t pay your taxes this year by May 17th?
- Don’t beat yourself up and Deal with it
- File a Personal Extension No Matter What
- Send in any $$ You Can with Your Extension
- Make a Plan and Estimate the Damage before the October 15th Deadline
You can Deal with It!
First, many of us at some point in our lifetime are going to experience at least one year where we’re faced with a daunting tax bill. Moreover, it’s probably no surprise that millions of Americans are dealing with the stress of paying taxes this Spring after going through the most turbulent and economically stressful year of their lifetime: i.e. Covid 2020.
However, not being able to pay one’s taxes is actually a very common occurrence. Even the most careful and successful people can have a problem paying their taxes due to an unforeseen situation.
So don’t stress if you can’t pay your taxes come May 17th! And yes, I know that’s easier said than done. But it’s absolutely critical you keep your wits about you. Ignoring the situation will only make it worse.
Too many people get overwhelmed, feel like it is a hopeless situation, choose to do nothing at all, and then mistakenly think that the problem will be the ‘same problem’ if they deal with it later. Wrong. There are things you can AND need to do that will lessen the pain, and frankly minimize collateral damage.
File a Personal Extension no matter what!
Even if you can’t pay, if you don’t file an Extension by May 17th, it only makes things worse! The penalties for ‘Not Filing’ are far worse than for ‘Not paying’.
IMPORTANT NOTE: Filing an Extension on your personal 1040 is NOT an extension to pay, BUT it will save you penalties. With the Extension you can now take your time to file your return BEFORE October 15th and pay what you can before then. However again, the most important thing an Extension does is help with penalties for approximately 5 more months of time. The IRS just doesn’t want to be in the dark during this period of time and nails you with penalties for not keeping them ‘in the loop’. They gave you until May 17th this year, but you HAVE TO REQUEST more time if you want until October 15th.
Also, remember it’s ‘o.k.’ to File an Extension. So many people think that they are going to be audited if they extend. Wrong again! This couldn’t be further from the truth and it’s actually the exact opposite! Statistics show you actually reduce your chances of an audit by extending.
2020 Tax Return Extension Deadlines
Send what $$ you can with Your Extension
Include as much of a partial payment as possible with your personal tax return (1040) when you file your Extension. Complete a rough draft of your tax return if necessary, and even If you estimate a little high on what you might owe, it will simply come back to you as a ‘refund’ when you DO file. Not a big deal if you hate paying interest to the IRS.
Even if you can’t pay your taxes, file your Extension (Form 4868)! This will prevent the late filing penalty or “Failure to File Penalty” (which is 5% per month or part thereof). So…file your Extension, THEN start saving up your money and file your Tax Return on time (by October 15th)…pay what you can…but no matter what, file your 1040 even if you can’t pay.
In fact, consider borrowing the funds from someone else to pay the IRS (probably not a credit card with crazy interest rates- be smart). However, typically paying a 3rd party reasonable interest for a loan to pay your taxes will be cheaper and certainly less financially stressful.
This is actually a very common situation when taxpayers are a little short…even on May 17th this year. Believe me when I tell you that you’re not alone. Millions of people will file an Extension on May 17th and still owe- it’s ok…it’s not the end of the world.
How much will I owe in interest and penalties between May 17th and October 15th?
Now that you’ve hopefully filed your Extension is time to put together a plan of attack. Quickly determine how much you ARE actually going to owe so that you know what the ‘damage’ is. IF you can’t pay, there’s no rush to hurry and file before October 15th. The penalties and interest are going to accrue not matter what between now and then. However, MAKE SURE you still file by October 15th.
The reason why I want you to at least ‘prepare’ your tax return is so that you can start thinking about payment arrangements and have a ‘reality check’ as to how much the tax bill will be including penalties and interest. Many times it’s not as bad as you think and the stress of ‘not knowing’ is far worse than having a figure in mind to work towards.
Here’s how the interest and penalties are calculated on what you owe between now and October 15th, AND continuing thereafter:
- Interest due – The interest on any unpaid taxes accrues at the annual rate of six percent (6%). Not too bad actually, but it’s the penalty that will catch up to you.
- Penalty due – This falls under the “Failure to Pay” penalty accrues at the rate of only one-half a percent (1/2%) per month or part of a month (to a maximum of 25%) on the amount actually shown as due on the return.
EXAMPLE: In real numbers, if you file an Extension on May 17th, and take the next five (5) months to quickly pay your tax bill (let’s assume before October 15th), and your tax bill was $10,000, your interest and penalties would be as follows: 3% in compounding interest for approximately 1/2 of the year, AND 3% in penalties (1/2% x 6 months). The total would be approximately $550 in penalties and interest. Again, not the end of the world and not too bad of an interest rate either. BUT you have to work quickly because those penalties add up fast.
Finally, if you aren’t able to pay by October 15th, we’re in a whole new set of rules and options. Many people think they can ‘settle for pennies on the dollar’, or if they don’t file the penalties won’t change, OR the extension covers them past October 15th. ALL of those assumptions are Wrong! Make sure you read my separate Article on owing the IRS after this drop-dead date “What to do If I can’t Pay My Taxes by October 15th?”
Business Extensions and Personal Extensions are treated differently
Now, a quick word for you side-hustle or full-time business owners out there.
- If you had an S-Corp in 2020 – The Deadline for an Extension was March 15th, 2021.
- If you had a C-Corp in 2020 – The Deadline for an Extension was April 15th, 2021.
- If you had an LLC with 2 or more partners in 2020 – The Deadline for an Extension was March 15th, 2021.
IF YOU missed any of these deadlines, the penalties and interest will add up quickly! Get on it immediately.
If you simply had a single-member LLC (owned 100% by you), you can file it on your 1040 Tax Return on Schedule C if you received a 1099-NEC for services or sales, a Schedule E if you had a rental property, or Schedule F if you had a farm.
With a pass-thru entity (like a multi-member LLC or S-Corp) any federal penalty is based on the number of shareholders or members, and the months the return is late. For a C-Corporation, the penalty for late filing is a monthly penalty based on the taxes owed or a minimum penalty of $435.
Business owners need to take these deadlines also very seriously and pay attention to the type of business they have and the filing deadline. Please see my separate Article “Do I need to file an Extension for My Business Tax Return by March 15th?” for more detailed information on this topic.
In sum, I know this can be a very complex topic with lots of math involved, so if you are in a predicament and missed a deadline, or owe any taxes whatsoever, get professional help and be cautious of radio or tv ads that ask for money upfront. Please contact an attorney or CPA in our office that can discuss the situation if you need further assistance.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.