“You'll want to do all you can to avoid being hit with tax penalties and interest if you end up owing money to the IRS on your 2021 tax return,” CNN Business wrote.
“Even a relatively small balance owed can balloon quickly. Say you owe the IRS another $1,000, but don't file your return or pay the money for six months past the original due date. Your bill could grow to at least $1,615,” it continued.
For those who are subject to a failure-to-file penalty—and don’t request an extension—know that it comes out to 5 percent of the unpaid tax one owes for each month or part of a month that the tax return is late. However, the maximum penalty is capped at 25 percent of the outstanding balance.
Late Payment Penalty
Moreover, make sure not to forget about the late payment penalty.
“Even if you file on time or file for an extension and avoid the failure-to-file penalty, you could be subject to a late payment penalty unless you pay off your balance in full by the original filing date,” the news outlet explained.
This particular penalty comes out to 0.5 percent of the outstanding balance for every month or part of a month that one is late, and it is also capped at 25 percent of the outstanding balance.
“Keep in mind that if you don't file your taxes or pay what you owe, you'll be hit with both the failure-to-file fee and the late payment penalty,” CNN warned.
Better to Owe the IRS?
However, in some cases, it is actually better to owe money to the IRS come tax time, as pointed out by personal finance expert Christy Bieber at The Motley Fool.
“While this may not sound fun, I actually prefer to owe money rather than get a refund,” she wrote. “And I’ve set up my tax payments throughout the year in order to make that happen.”
The main reason for this strategy is to keep one’s money for as long as possible and grow it.
“The reality is, if you are getting a refund, it’s not the windfall that it may seem to be at first glance,” Bieber claimed. “All that’s happening is you are getting back money that you overpaid and didn’t actually owe. You’re getting your own money returned to you after you’ve been without that cash for months as you waited to file your tax return.”
For those who kept their money throughout the year, that cash could have been used to invest in a high-yield savings account, stocks, or other investments.
Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.