There’s one thing that Uncle Sam is serious about it: Taxpayers must file federal income tax returns when required. The IRS is notoriously tough on no-shows and insists tax returns are filed when due — whether or not full payment can be made with a return.
What happens if you don’t file a tax return on time? The penalties can be steep. Assuming you will owe tax to the IRS, the delay may result in penalty and interest charges that increase your tax bill by 25 percent or more. It could even result in criminal prosecution. On the other hand, there’s no penalty for failing to file a return if you’re due a refund. However, if you wait too long to file, you might forfeit the refund.
Occasionally, the IRS will cut you some slack if you have “reasonable cause” for failing to file a return, as opposed to “willful neglect.” If you’re citing a serious illness, however, the IRS expects you to file once you get better.
One case: A California taxpayer claimed that he could not file a return and make a timely payment due to gall bladder surgery, an accompanying illness, and the inability to work for the next four months. However, after his recovery, the taxpayer was able to resume his legal practice, pay business expenses, manage two rental properties and take care of two minor children.
Years later, he filed a return for the year in question but did not include payment for the $8,122 due. The IRS sent a bill for the amount, plus more than $3,000 in penalties. The man sought relief from the penalties, raising a reasonable cause defense because of his surgery.
For an illness to constitute reasonable cause, it must incapacitate you to such a degree that you are unable to file your return. Since the individual in this case was able to continue conducting other business, the court ruled that his health problems did not constitute a “reasonable cause for his delay in filing and paying taxes.” (Donald Ramirez, TC Memo 2005-179)
“A showing of reasonable cause requires (an individual) to demonstrate that he exercised ordinary business care and prudence, but nevertheless was unable to file or pay the tax within the prescribed time … For illness to constitute reasonable cause for failure to file, (he) must show that it incapacitated him to such a degree that he could not file his returns.”
— U.S. Tax Court, Ramirez
Fall-back position: Depending on the circumstances, a late filer may qualify for a payment plan with the IRS. All payment plans require continued compliance with filing and payment responsibilities once the plan is approved. Our firm can provide the details.