An individual or business owner may feel confident in their record-keeping and book balancing abilities, but this level of confidence may change notably when it comes time to file taxes.

Paying Taxes vs. Filing Taxes: What’s the Difference?

It’s important to have an understanding of tax terms prior to filing, including acknowledging the difference between “filing” and “paying” taxes.

Paying Taxes: Income Tax is a tax that the U.S. Government places on all of the income that is earned by individuals or businesses. Income taxes are used to fund public services, pay for government obligations, and provide for the community’s goods.

Taxable earned income includes:

  • Long-term disability benefits received prior to the minimum retirement age.
  • Net earnings from self-employment. For example, owning or operating a business or farm, self-employment as a minister or member of a religious order, or a statutory employee.
  • Union strike benefits.
  • Wages, salaries, tips, and other taxable employee pay.

Filing Taxes: in the United States, a tax return is a form that is annually filed with the Internal Revenue Service (IRS) that reports income, expenses, and other important tax information. Taxpayers file their taxes to calculate their tax liability, set up tax payments, or request refunds from tax over-payments. Filing late or failure to pay could result in penalties.

IRS Late Filing Penalties

In order to file taxes, taxpayers will have to wait until they have received all of the necessary documents (W-2 and 1099 forms). These forms show a detailed breakdown of their earnings throughout the year. The date to start filing may vary, however the deadline to file is April 15th for most taxpayers. Taxpayers should file their tax returns and pay any tax owed as soon as possible to keep interests and penalties to a minimum.

One of the reasons taxpayers may file late is that they simply don’t understand how to file, or they have new or unusual tax obligations they’ve never had to report before. This can include being newly married, recently widowed, or could even include a recent investment into cryptocurrency. Income generated from cryptocurrency transactions is a form of taxable income. Cryptocurrencies are taxed as property, meaning that capital gains taxes may apply. Although this may be confusing for someone reporting cryptocurrency income for the first time, it is important to file on time to avoid penalties.

Failure-to-File Penalty

There are multiple failure-to-file penalties that can accrue both immediately and over time.

  • Immediately: there are two different penalties that can be applied immediately — one for filing late, and one for paying late. These penalties add up quickly since interest accrues on top of both forms of penalties.
  • After 60 Days: if taxpayers file their taxes more than 60 days past due, the minimum penalty is $205 or, if what they owe is less than $205, 100% of the unpaid tax. The penalty can accrue as much as 5% of the unpaid tax each month with a maximum of 25%.

Penalty for late payment, in general, results in a 0.5% monthly fee of the taxpayers’ unpaid taxes.

How to File An Extension

If a taxpayer knows they are unable to file on time, they can file for an extension rather than filing late

  • Form 4868 will need to be filled out and submitted to the IRS online or mail by April 15th.
  • An extension allows more time to finish the paperwork, not more time to pay.
  • If taxes are owed, payments are still due by April 15th.

How Long is An Extension For?

Filing an extension gives the taxpayer an additional six months to complete their tax return. If the taxpayer is abroad, they have two additional months to file their return, and pay the amount due (without having to file for an extension), as long as they are a U.S. citizen or a resident alien, and they are out of the country on the filing due date (April 15th).

Filing Taxes Late

It is better to file taxes late than never. Not only do taxpayers avoid additional late fees and penalties the sooner they file, but they also only have three years from the original filing date to claim any refunds that are owed to them from exemptions, deductions, or tax withholdings. Any refunds that are not claimed are automatically forfeited to the IRS.

Claim A Return

Filing late (rather than never) gives the taxpayer the opportunity to declare their deductions and exemptions. If a taxpayer has any income and doesn’t file taxes to claim their deductions and exemptions, there is a possibility that the IRS will file a return for them, and exclude those from the claim.

Social Security Benefits

If a self-employed taxpayer doesn’t file taxes, they may miss out on the opportunity to receive credit towards their Social Security retirement or disability benefits.

What if You Owe More Than You Can Pay?

If a taxpayer is unable to pay the full amount of taxes due, there are options. It is still recommended that they file their return on time and pay off as much as they are able in order to avoid late fees and penalties. However, if they still can’t pay their taxes, they should contact the IRS to discuss payment options such as: short-term extension pay, installment agreements, compromise, or a temporarily delay of collections by reporting their account as currently not collectible until they are able to pay.

If You Fail to File

Failure to file in general can lead to penalties greater than those of late filing. Failing to file taxes, or failure to pay, results in the IRS attempting to contact delinquent tax filers to remind them to file. If the taxpayer still fails to pay after multiple attempts by the IRS to contact them, they will send a representative to the taxpayer’s home or workplace to collect what they owe, usually if it is $25,000 or more. At this point, if the taxpayer is still doesn’t pay, they risk losing assets, such as their car, and may even spend time in jail.

Cryptocurrency users aren’t excluded from these penalties. In fact, they can calculate their crypto taxes ahead of time to estimate how much they owe, so they can avoid late filings and failure to file.

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Disclaimer: this article is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.