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A topsy turvy tax season, replete with a payment deadline extension and mid-stream tax code changes, is coming to an end on Friday.
For people who requested extensions, October 15 is the final day to send the Internal Revenue Service their 2020 tax return.
That sounds pretty ironclad, right? Well, here’s an understatement: tax rules can get complicated, which means there could be life for a still-pending return even after the Oct. 15 deadline. But laggards face risks.
At a time when so much federal tax money is potentially on the table — from missed-out 2020 stimulus checks to tax breaks on jobless benefits — it’s best to know what the Oct. 15 date does and doesn’t mean.
First, let’s rewind to the spring.
More than a month into the filing season, the IRS pushed the deadline to pay federal income taxes and file a return to May 17, back from the traditional April 15 date.
The extra time afforded the IRS some breathing room to juggle a third round of stimulus payments authorized in the $1.9 trillion American Rescue Plan, as well as tax provision changes in the freshly-passed law. One change said the first $10,200 in jobless benefits an unemployed person received during 2020 were exempt from income tax, an effort to help the millions forced to the unemployment line by the pandemic.
Despite the new deadline, the Oct. 15 due date for returns after an extension stayed intact and taxes still had to be paid by May 17. (The IRS can arrange installment plans for people who could not pay in full by that time.)
More than 16.5 million households asked for extensions this year, according to IRS projections.
Last month, in the wake of Hurricane Ida, the IRS said Louisiana residents and business owners were given a Jan. 3, 2022 deadline to file their 2020 returns. The tax collection agency has given extra filing time to other states and communities recovering from natural disasters.
Taxpayers who miss deadlines face penalties
“If you do not owe any taxes, generally there is no penalty for filing that return late, after Oct. 15,” said April Walker, lead manager for tax practice and ethics with the American Institute of CPAs, a professional organization.
It’s still wise to file as soon as possible, even if there are no looming penalties, she emphasized. It’s best to file electronically, instead of via mail, she added. “If you do owe taxes, we certainly recommend you go filing and paying as soon as can.”
The price of blowing the deadline is based on the tax bill a person faces, Walker explained. If a person owed taxes and didn’t seek an extension, they would be facing failure to file and failure to pay penalties from May 17 onwards.
If a person gets an extension until Oct. 15 but still hasn’t paid in full, a return filed after Oct. 15 would incur a failure to file and a failure to pay on the remaining sum.
So if a taxpayer is ready with a tax return now, but is still unable to pay, Walker said they should at least file the return to avoid the failure to file penalty. And don’t forget the IRS repayment plan options, she said.
The failure to file penalty and the failure to pay penalty both hurt, but Andy Phillips, director of H&R Block’s Tax Institute, noted the filing penalty is steeper and builds faster than the failure to pay penalty.
The failure to file penalty starts at “5% of the unpaid taxes for each month or part of a month that a tax return is late,” the IRS notes. The payment penalty starts at “0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid,” the IRS said. Both come with interest.
The top total penalty would be 47.5%, the IRS said — that’s a total 22.5% for late filing and 25% for late payment.
Here’s the twist: if a person doesn’t owe taxes and is due a refund, they have a three-year window to file their return free of any penalties. After three years, however, the unclaimed money reverts back to the Treasury Department.
So if a person didn’t file their 2020 taxes but owed nothing, Walker said they’d face a May 17, 2024 to claim their refund. If they filed an extension, it would be Oct. 15, 2024.
This year, an estimated 1.3 million taxpayers were in danger of missing out on 2017 tax refunds if they didn’t file a return, the IRS said.
More time for (potentially) more money
The bit of wiggle room gives time to people who still haven’t received any stimulus check money, or haven’t received the complete amount owed.
At this point, the money from the first and second rounds will come in a “recovery rebate credit” lumped into the return. “If you qualify for it….it can be claimed on the return you are filing, as long as you file by three years,” Walker said.
Another chance for cash can come with the advance payments on the expanded child tax credit payments. Households that have returns processed by Nov. 1 may be eligible for the November and December payments, the IRS said.
The IRS is working off 2020 tax returns to determine eligibility, or 2019 returns if the 2020 returns aren’t available. The advance payments will send eligible parents monthly checks up to $300 for each child under age 6 and $250 for kids between the age of 6 and 17.
Household with returns processed by Nov. 29 may still make it for the December payment, the IRS said.
Amended returns
The wiggle room and extra three years might also help if a taxpayer received a break where the federal government said it would not assess income tax on the first $10,200 in jobless benefits a person received in 2020. The exclusion became law in March, at a time when millions of people had already filed their taxes.
The IRS subsequently said it would recalculate refunds and send along more money to the people who already filed. From May through July, the IRS distributed at least 8.7 million payments based on the adjustments.
But if the recalculations made someone newly-eligible for certain tax credits they hadn’t originally claimed, the IRS said it wouldn’t factor in even more money based on the new chance for more money.
A taxpayer would have to file an amended return to do that, the agency said. People generally have three years from the due date to file an amended return, Walker noted.
For example, if parents with children originally didn’t claim the earned income tax credit and became eligible for the credit after the adjustment on jobless benefits, they would have to submit an amended return.
The IRS sent notices to taxpayers informing them of the ways it readjusted the return, Walker noted. The best tactic would be bringing the notice and the original return to a tax professional who could determine if there were still chances for more money in newly-available credits.
Taxpayers in this scenario might also want to check if they can get any extra state tax money too, Phillips noted. Three years is “plenty of time,” he said. “But that’s also money they are leaving on the table until they act.”
