Failing to file your federal income tax return on time triggers IRS penalties and interest. Both are calculated as a percentage of the overdue amount. Although they increase the longer you owe money, they're capped at a legal maximum. Eventually, the IRS could investigate your finances and take legal action against you. Fortunately, the IRS offers two important programs that could help you pay an overdue tax bill.
The Failure to File Penalty
The IRS can penalize you for failing to file your tax return on time. It adds a penalty of 5 percent of the amount you owe for every month or part of a month that you are late filing your return, up to a maximum of 25 percent of the unpaid amount. One exception applies, however. If your return is at least 60 days late, a minimum penalty applies: the lesser of $135 or 100 percent of the amount you owe. This means that your penalty could be as much as 100 percent of your unpaid tax bill, if your return is at least 60 days late and your unpaid tax bill is $135 or less.
In addition to penalties, the IRS also charges interest on unpaid taxes. The interest rate is equal to the federal short-term interest rate plus 3 percent, and the rate changes quarterly. Interest is compounded daily. Once you have paid your tax debt in full, including penalties and interest, you can ask the IRS to refund some or all of the interest charges. The IRS generally won't grant this request, however, except in unusual circumstances -- if an IRS mistake or delay increased your interest penalty, for example.
If the IRS determines that you owe back taxes, it can place a lien on all of your property, including your personal property, real estate and wages. Eventually, it can garnish your paycheck and seize your property. Once the IRS places a lien on your property, you can't remove the lien even by filing for bankruptcy. Even if you file for bankruptcy before the IRS places a lien on your property, only certain tax debts can be discharged in bankruptcy.
It is a crime to fail to file a tax return for a tax year in which you owe the IRS money. The IRS has a policy of declining to prosecute taxpayers who file late tax return before they are notified that they are under criminal investigation. If the IRS does recommend criminal prosecution and you are convicted, you can be fined up to $25,000 and imprisoned for up to a year for each year you fail to file.
You can claim your refund for up to three years after the due date of the tax return that should have claimed the refund. If you owe taxes for other tax years, however, the IRS may deduct the amount of your refund.
- Alvin Brown & Associates: Background Information on the IRS Tax Penalty
- Internal Revenue Service: Filing and/or Paying Late
- LawFirms.com: Penalties for Tax Evasion
- Internal Revenue Service: Frequently Asked Questions for Past Due Return Filers
- Internal Revenue Service: What to Do if You Haven't Filed Your Tax Return
- Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com