When you prepare your taxes each year, you will typically have a refund coming or you owe the Internal Revenue Service more money. If you are due a refund, there’s no penalty if you don’t file a return, but you can’t get the refund until you do. If you owe money, it’s another matter. The IRS can impose a range of penalties for non-payment of taxes or late filings of income tax returns.
Filing and Penalties
If you owe unpaid taxes and you can’t pay what’s due right away, go ahead and file your return on time anyway. Penalties and interest are assessed from the date your return is due, which is normally April 15, whether or not you file. In addition, If you are late filing, you will be assessed a late filing penalty of 4.5 percent of the balance due for each month or part of a month you are late, up to a maximum of 22.5 percent.
The penalty for non-payment of money owed when you file your tax return is 0.5 percent per month, starting with the month you return is due. This penalty for non-payment can accumulate to a maximum of 25 percent of the balance due. There are circumstances when you might not be able to file or pay taxes due because of circumstances beyond your control. If you can show reasonable cause for non-payment, the IRS may waive the penalty.
You have to pay interest on unpaid taxes, in addition to the penalty for non-payment. Interest is compounded daily starting on the day your tax return is due. The interest rate is variable and is determined by adding 3 percent to the federal short-term rate. The IRS publishes the updated interest rate every three months. Check the IRS Internal Revenue Bulletin for the current rate (see Resources).
Taxpayers sometimes face situations that make it difficult or impossible to pay everything they owe on time. The IRS recognizes this and makes allowances if you work with them. If you have unpaid taxes due and make an arrangement to pay what you owe in installments, the penalty rate is reduced from 0.5 percent to 0.25 percent per month. On the other hand, if you ignore IRS bills and you receive a notice of intent to levy, you have 10 days to respond. After that, the penalty jumps to 1 percent per month. Finally, if you simply can’t get your tax return filed by the due date, you can get an automatic six month extension by going to the IRS website. This won’t get you out of the late payment penalty or interest charges, but you will avoid that 4.5 percent per month late filing penalty.