How to Avoid Penalties on a Late Tax Return

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IRS April 15 Due

File any of the following forms on time, by April 15th, and you won’t pay a late-filing fee on your tax return.

You won’t scrape by penalty-free, but you can do some damage control with the right form. It’s possible to avoid the late-payment fee –the 1127 would allow you that relief if you qualify to file. No one, though, can skirt interest payments.

The forms we describe below each serves a unique purpose. One is a simple deferral of tax payment, the second is a monthly installment plan, and the last offers the greatest relief from penalties – but, again, you only qualify to file that form in unique circumstances, like a severe hit from unemployment.

Form 9465

  • This form offers a monthly payment plan– terms can be as long as 6 years – if:
    • You’ll file Form 1040 (most do)
    • You pay self-employment taxes
    • You’re responsible for a Trust Fund Recovery Penalty
    • You’re responsible for a partnership liability no longer in operation
    • You’re responsible for taxes on a limited liability company no longer in operation
    • Even if you do want a monthly payment plan, you don’t necessarily have to file a 9465. If you owe less than $50,000, you can file online.
    • Penalties & interest
      • Thanks to penalties and interest, a monthly payment plan doesn’t always make sense. A bank loan or credit-card payment may be more economical if you can find lower rates. Because, again, you face 3% annual interest as well as 6% a year in late-payment penalties. In total, that’s 9% APR, with the former compounding daily and the latter compounding each month.

Form 4868

  • This form offers an automatic 6-month extension (until October 15) for filing the following forms:
    • 1040
    • 1040EZ
    • 1040NR
    • 1040NR-EZ
    • 1040-PR
    • 1040-SS
    • 709
    • Penalties & Interest
      • This form is for filing late. Again, as we iterated earlier, if you have to pay taxes this season, do pay on time. With the 4868, you can in fact pay but pay a little less. Put forward 90% of what you think you owe and you’ll avoid late-payment penalties – we say what you “think” you owe because this form allows more for estimates and rounding, whereas rounding on a traditional 1040 might lead to an IRS audit.
      • Even if you do avoid the late-payment penalty, you’ll still owe interest on any outstanding amount, at a rate of 3% per year, compounding daily.

Form 1127

  • The 1127 is more forgiving than the 4868, but it’s harder to qualify: there are veritable legal requirements. You’ll get a 6-month extension, but only if:
    • Your tax liability is less than $50,000
    • Your AGI is less than $100,000 if you’re single, married filing separately, head of houselhold, or a qualifying widower,
    • Your AGI is less than $200,000 if you’re married filing jointly
    • You suffer from “undue economic hardship” because of unemployment or you’re self-employed and netted a loss.
    • Penalties & Interest
      • There’s no penalty for late payment!
      • But you do still face interest payments, of 3% per year, compounding dailiy.