Late filers face higher interest rates and renewed penalties

Millions of Americans are racing to file their 2021 federal taxes before time runs out. 

The 19 million taxpayers who requested an extension on the April deadline have until Oct. 17 — because Oct. 15 falls on a Saturday — to submit their documents, leading to a mad dash for tax professionals and accountants as the due date approaches. 

After two years of leniency due to pandemic-related chaos, the Internal Revenue Service is back to imposing fines on those who miss the deadline. Plus, the interest rate for underpayments increased to 6% on Oct. 1, up from 5%, so it's now going to cost you even more if you haven't paid everything you owe.

It's all adding up to a much different tax environment than last year. 

"I've seen an uptick in people now treating Oct. 15 like the new April 15," said Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore. "The extension came in as a popular tool for people to kick the can down the road a bit and give themselves more time."

For those who haven't filed their taxes yet, there's still time, but the clock is ticking. Financial pros have some tips for navigating this year's extension season, as well as some general advice for making taxes as painless as possible. 

Paper issues

Mailing in your tax return is becoming a thing of the past, and those who stick with it are facing delays. Peppers recommends filing online.

"It's more efficient and you can get your return processed faster," he said.

It also allows you to avoid the paper backlog currently plaguing the IRS. At the end of May, the agency had more than 21 million unprocessed paper tax returns. Some people haven't even received their 2019 and 2020 refunds as the IRS struggles to recover from pandemic disruptions. 

To get their refunds back as soon as possible, taxpayers need to make sure to double check all their personal information when filing, said Lisa Greene-Lewis, a CPA with TurboTax. It sounds like obvious advice, but mistyping a digit in a Social Security number or misspelling a name could lead to headaches later on, especially if they're trying to claim Child Tax Credits.  

"One of the most frequent mistakes people make is gathering incorrect Social Security numbers for dependents, and you need that to get some of the credits for deduction," she said. 

Beware the penalties 

Two of the most common fines a taxpayer can incur from the IRS are the failure-to-file and failure-to-pay penalties. The first — which is charged for not submitting all documents — is 5% of the unpaid taxes for each month that the taxpayer is late, up to 25% of unpaid taxes.

Meanwhile, the failure-to-pay penalty is 0.5% of the tax owed after the due date for each month it's unpaid, up to 25%. 

In August, the IRS announced that it would eliminate — and refund in applicable cases — late fees for those who missed the filing deadline during the past two years. However, the agency is unlikely to do the same for late filings this year, as pandemic disruptions ebb. 

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"Normally they just don't blanket waive those for everybody for an entire year," said Eric Bronnenkant, head of tax at roboadviser Betterment. "It was very nice to have, but I don't think anyone should rely on that to happen again."

It's also important to note the interest rate on underpayments, which is rising as the Federal Reserve hikes its benchmark rate to combat inflation.

"People could get caught off guard this year and the coming years looking at interests rates coming back up," said Beth Handwerker, a financial planner at James Investments. "That could be a higher rate than they were expecting."
Hack your return

For those willing to spend a bit more time on their taxes, there are ways to both pay less and get more in refunds, this year and in future years. 

Greene-Lewis recommends paying close attention to the Child Tax Credits, which increased in 2021 to $3,600 for qualifying kids under age 6 and $3,000 for other qualifying children under age 18, up from $2,000 in prior years. 

If a taxpayer didn't receive the third stimulus check in 2021, they can add that to their filings and potentially receive a recovery rebate credit. People also often forget that you can receive a credit for owning an electric vehicle, Greene-Lewis said. 

And if they're struggling to figure it all out, they can still get an accountant. 

"Don't think that just because you filed your extension by yourself that you're locked you into filing your taxes on your own," Pepper said. "I've had many clients file their own extensions and then became clients after that."