If your income exceeds a certain level -- which varies based on such factors as your age, filing status and the type of income you receive -- you are required to file a federal tax return. If you owe the government money and don't file, things can get ugly fast. If you don't owe any taxes and it looks like you are not going to be able to file on time, you can always request an extension, but there is no penalty if you don't.
Late Filing Penalty
Late is late, as far as the Internal Revenue Service is concerned. If you owe taxes and don't file your return by the due date, the IRS will hit you with a late-filing penalty equal to 5 percent of the taxes you owe for each month or part of a month for up to five months. If you are more than 60 days late filing your return, your minimum late-filing penalty is the smaller of $135 or 100 percent of your outstanding taxes -- and you still have to pay the taxes. You can avoid the late-filing penalty by requesting an automatic six-month extension.
No Taxes Owed
Federal tax law requires you to file a tax return for any year in which a filing requirement exists, such as when your income exceeds the threshold for your filing status. You don't have to file a tax return if you are not required to file a tax return, such as when your income for the year was below the limit. That sounds pretty straightforward. The problem is that even if you are required to file, there are no penalties for not filing a tax return if you don't owe any taxes. Since there is no penalty for not filing if you owe no taxes, there is no benefit to filing for an extension.
The IRS offers an automatic six-month extension for filing a federal tax return to anyone who asks. The kicker is, you have to ask. If you owe tax money, you still need to pay it by the due date, or you'll get hit with late payment fees and interest, regardless of whether you file for an extension, but at least you'll avoid the late-filing penalty. If it looks like you are going to be late filing your tax return, it doesn't hurt to request an extension, even if you don't think you owe any taxes. If it turns out you're wrong and you actually do owe federal income taxes, you'll be glad to avoid the penalty.
You might not owe any taxes, but that doesn't mean the IRS doesn't owe you a refund. The only way you can get a refund on any tax money that you have overpaid is by filing a federal income tax return. If you don't file a tax return within three years you will permanently lose any tax refund, including tax credits like the earned income credit. Filing an extension will have no affect on your ability to receive a refund, since the three-year limitation begins with your original due date.
Filing a tax return, even if you don't owe taxes this year, is a good way to protect yourself against future audits of past returns. The three-year statute of limitations on IRS audits doesn't start until you file your tax return. If you don't file, the clock doesn't start running. Filing an extension, even if you don't owe any taxes, will give you time to make sure your tax return is filled out properly. If you are required to file but don't, the IRS can file a substitute return for you, but it won't include any exemptions or deductions for expenses.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.