You might find it difficult to pay your taxes in one lump sum when they are due. If this occurs, you could propose a payment plan to the Internal Revenue Service. If you file your taxes by the deadline, you can avoid the failure-to-file penalty. But failure-to-pay penalties continue to accrue under an installment agreement.
IRS Installment Agreement
If you are financially unable to pay any tax due in one lump sum, the IRS allows you to enter into an installment agreement or payment plan. You must determine what minimum monthly payment you can make. Although approval of a payment plan is not automatic, the IRS typically approves amounts under $25,000 without requiring financial documentation of your payment ability when you request an installment agreement in a timely way.
Failure-to-pay penalties often provide the biggest adverse financial impact in a payment plan. Based on a number of internal factors, the IRS' failure-to-pay penalty will range from 1/2 percent per month of the unpaid balance or 6 percent annually. The maximum penalty is 25 percent. Failure-to-file penalties, which fewer taxpayers encounter in a payment plan, are typically 5 percent per month, also with a maximum of 25 percent. As of 2012, the IRS charges interest of 3 percent annually.
Penalty Elimination or Reduction
The only way to eliminate or decrease any potential penalties or interest due on taxes you owe is to pay in full by the due date. Occasionally, as in 2012 for the 2011 tax year, the IRS will waive penalties during a limited period for people who enter into payment plans or whom the IRS deems as suffering economic hardship. The IRS typically informs taxpayers of such waivers several weeks before the April 15 filing deadline.
If you neglect to file a tax return, you might receive a bill for taxes based on the IRS’ estimate. In that case, if you can't pay the bill at once, you can enter into a payment plan. Failure-to-file penalties will continue to accrue under that payment plan until you file the missing return. File your taxes on time whether or not you can pay your balance in full.
Failure-to-Pay and Other Penalties
Failure-to-pay penalties are also referred to as late payment penalties. The IRS assesses the penalty percentage on the outstanding balance in your payment plan at the end of each month. Once the IRS approves your payment plan, you must pay a one-time fee to set up the installment agreement. If you do not deliver your payment to the IRS by the due date, you may accrue additional charges and penalties. You also risk default on the payment plan, which could result in a reinstatement penalty.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.