Every 15th day of April is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. Some people start to panic if tax return filing is approaching. The IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.
If you did not pay your taxes fully when filing your tax return, the IRS will send you a bill for the amount owed. This bill is the beginning of the collection process. The IRS notice will explain the amount you owe, including any taxes, penalties, and interest charges. This notice will also demand full payment of your balance due. The IRS recommends, that you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You can also contact the IRS to discuss your payment options. The may be able to provide you some tax relief such as a short-term extension to pay, an installment agreement or an offer in compromise, by temporarily delaying collection by reporting your account as currently not collectible until you are able to pay or in some cases IRS may waive your penalties.
Failure-to-File Penalty
The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, and you can lessen additional interest and penalties by paying as much as you can with your tax return. The IRS will work with you if you try to explore other payment options, such as getting a loan or making an installment agreement to make payments.
The penalty for filing late accrues the day after the tax filing due date. Normally, penalties are 5% up to 25% of the unpaid taxes for each month or part of a month that a tax return is late.
Failure-to-pay Penalty
If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of half of 1% of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time. An example, IRS released an announcement for victims of the recent severe storms in parts of the South and Midwest and those affected by the Boston explosions tragedy, will be given a special penalty relief to taxpayers who requested an extension of time to file their federal income tax and payment extensions.
A taxpayer may not face a failure-to-pay penalty if he or she requested an extension of time to file your individual income tax return for the prescribed period and paid at least 90% of the taxes owed with the request. However, you must pay any remaining balance by the extended due date.
The taxpayer will pay a maximum penalty of 5% if both the 5% failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month. If a tax return was filed more than 60 days after the due date or extended due date, the minimum penalty is the $135 or 100 percent of the unpaid tax, whichever is lower. If you don’t pay your taxes on time, the penalties can be severe. The longer you wait to resolve your tax debt, the more difficult and costly it will be.
Penalties for Past Due Taxes
The penalties for nonpayment are stiff, monthly late fees and interest charges can grow exponentially in size, making it even more difficult to pay. The longer your taxes are unpaid, the larger the consequences and could result in the seizure of your assets or properties and sell them to satisfy your tax debt. The IRS may also levy your wages, bank accounts, or retirement income and apply the funds to your tax liability. If you are owed any tax refunds in the future, the IRS may take these as well.
The following penalties and fees that apply to past due to taxes:
• Interest is compounded daily and accumulates on the owed amount (the interest rate is equal to the Federal short-term rate, plus 3%)
• The late payment penalty is .05% of the owed amount and increases each month the taxes remain unpaid (up to a maximum of 25%)
• The combined penalty for both filing and paying late is 5% of the tax owed (if your return is over 60 days late, the penalty may be up to 100% of the tax owed). An Exception to this is when you can provide reasonable cause for not filing or paying on time, you may be able to avoid incurring the late filing/payment penalty.
Lastly, as a taxpayer it is important to understand that you have rights and protections when it comes to the tax collection process such as the right to be informed, the right to pay no more than the correct amount of tax, the right to challenge the IRS’ position and be heard, the right to appeal an IRS decision in an independent forum, and the right to retain representation.
