Uh oh. April 15th has come and gone and you were unable to complete your tax return by everyone’s favorite deadline. What happens now? If the IRS owes you a refund, no biggie; there are no penalties or fees in this case (apparently they don’t wish to discourage you from delaying their payment to you!) However, if you owe the IRS as a result of your tax return, the repercussions for being late are swift and severe.
Failure to File Penalty
This is the one of the harshest penalties the IRS has at their disposal. The penalty amounts to 5% of your original tax bill every month until you file and begins accruing the day after the tax due date. There is, however, a maximum penalty of 25% which is what you’re accrued after the fifth month you’re late. Even if your tax bill is small, they’ll still get you pretty good: if you’re more than 60 days late, there is a minimum penalty of $135 or 100% of your bill, whichever is smaller.
- High Tax Bill Example: Say you owe the IRS $10,000. At the 60 day mark you’ve accumulated a penalty of 10%, or $1,000. The minimum doesn’t apply because you’re already way beyond that. Your penalty will max out at $2,500 (25%) at the five month mark.
- Low Tax Bill Example: Say you only owe $100. After being 60 days late, you’ll incur the minimum penalty amounting to $100, so you’ve already doubled what you owe.
Failure to Pay Penalty
The failure to pay penalty is in addition to the failure to file penalty. However, this penalty is even more common because it can be incurred even if you’ve filed on time, but just underpaid your bill. The penalty is calculated as 0.5% of the unpaid portion of your original tax bill and doesn’t max out until it reaches 25%. If you’re upfront with the IRS that you cannot pay your bill, you can enter into an installment plan and reduce your failure to pay penalty by half. However, if the IRS issues you an “intent to levy”, meaning they have cause to believe you are intentionally not cooperating, the penalty to pay can then be doubled to 1%.
TIP: In the future, if you’re ever putting off filing your taxes because you can’t afford what you know you’ll owe, you should still go ahead and file and then explore your options. The failure to file penalty is much higher than the failure to pay penalty, and you can cut the latter in half if you set up a payment plan.
To top it off, the IRS charges interest on what you owe them. In contrast to the two penalties above which are calculated based on your original tax bill, interest is charged on the TOTAL amount you owe at any given point, including penalties and any prior interest charges. The interest rate used is the federal short-term rate plus 3%, so the rate will change every three months.
Of course there are always valid and justifiable circumstances that may have prevented one from completing their taxes on time such as military service, illness, or incarceration. To request a penalty waiver due to reasonable cause, the taxpayer must fill out and submit IRS Form 843.
What if You Still Don’t Pay?
If you choose to disregard your tax obligation, the penalties are only the beginning. They will fill out a substitute return on your behalf based on alternate sources, so you won’t be getting exemptions and your liability will very likely be overstated. Based on your substitute return, the IRS will then go after your money themselves, by levying your wages, bank accounts, or even your home.
The moral of the story: The IRS does not like to be ignored. If you missed the deadline, the most important thing is to be honest and forthright, and get it resolved as quickly as possible. Putting it off will only make the problem so much worse!