When you work for yourself as a freelancer or business owner, it’s really easy to procrastinate. You call the shots – you make the schedule – you decide when stuff gets done. As great as that is, it can also come to bite you when you realize you’re late on filing your tax return.
This is exactly what happened to Tina, an old friend of mine who runs a consulting business. She was so afraid of a high tax bill that she avoided filing for a full six months after the deadline. Funny thing is, she didn’t end up owing nearly as much as she thought, but her tax bill was almost double due to late fees.
Assuming you don’t want your profits to be eaten alive by tax penalties, you need to know what they are and how to avoid them. Here are lists of late tax filing penalties in the U.S., Canada and the U.K.
U.S. Tax Penalties
- The IRS will file a substitute return for you. That means that the government will assess any W-2’s, 1099’s, and similar documents in your name and calculate your taxes from there. You will lose out on any exemptions or deductions you may have gotten by filing on your own.
- You will be charged interest, late fees, and penalty fees – the amount of which will depend on the amount of money you owe or will receive and how late you are.
- The government will start a collection process, where they garnish wages, levy bank accounts, or place federal liens on your property to get their money.
- You will not get a refund if you have one. You must collect this within 3 years or it will be voided.
- If you do not file or pay taxes repeatedly, you could face jail time.
How to Avoid U.S. Penalties
If you want to avoid penalties for late tax filing in America, do the following:
- File some sort of return, even if you can’t pay it right away. The IRS is good about working out payment plans for taxes, and getting your tax paperwork in will ensure that you receive all the benefits you deserve. If you notice a mistake in your haste, file an amended return after the due date.
- If the government has already filed a substitute return for you, file an amended one on your own. They will still honor your deductions and exemptions. You just have to pay the fees for filing late.
- In the future, try making estimated payments to the government so you are less worried when tax season hits. Stress alone may cause you to procrastinate past the due date.
Canada Tax Penalties
The tax filing due date for Canada is April 30. Failure to file before that date may result in the following penalties:
- The day after the due date, you will be charged an extra 5% of your taxes owed.
- For every full month after that, you will pay 1% of the taxes owed, on top of the original penalty. This will happen for a maximum of 12 months.
- If you file late several consecutive years, you may be charged 10% of your taxes owed for the most recent year, plus 2% every month after for up to 20 months.
- If you do not report your taxes for multiple years in a row, you may be charged a federal and provincial/territorial penalty, each of which is 10% of your taxes owed.
How to Avoid Canada Tax Penalties
You can avoid the charges above by doing any of the following:
- Get your taxes filed without worrying about paying them. You can work out a payment plan later. You just need to get the forms in.
- If you notify the CRA about your failure to file for multiple years, they may waive the federal and provincial/territorial fees, depending on the circumstances.
- If you have to file late for reasons beyond your control, file a Request for Taxpayer Relief with the CRA.
UK Tax Penalties
Taxes in the UK were due January 31. If you didn’t file your taxes on time, you may face these penalties:
- If you are one day late, you will be charged £100. This happens even if you owe no taxes or pay all your taxes off that day.
- For up to 90 days past the due date, you will be charged the original £100, plus an additional £10 a day, totaling up to £1000.
- If you are six months late, you will be charged £300 or 5% of your taxes due, whichever is higher. This is in addition to the £1000 mentioned above.
- If you are a year late or more, you will be charged another £300 or 5% of your taxes, whichever is higher. This is on top of all money owed above.
- In serious cases, the HMRC may double the amount of taxes you owe as a result of late filing.
- The HMRC may also send you a tax estimate, which you have to pay (including interest) until you file your late return.
How to Avoid UK Tax Penalties
If you want to avoid the hefty fines above, here are some tips to keep in mind:
- Next time, file your taxes on time. Sounds simple, but it is the most effective way to bypass this problem entirely.
- If you do not have time to file your taxes properly, at least get something turned in and amend it later.
- If you have a legitimate excuse for not filing on time, you can appeal your penalties similar to how you may appeal a false court case.
- Pay estimated taxes throughout the year so you always have them in mind.
If you didn’t submit your taxes on time, or only have a short window left, try to get something in ASAP and you might just be able to bypass these penalties completely.