Tax time is…super fun, right? It's so easy and streamlined, the forms are simple and straightforward, and there aren’t grey areas that require hiring an expensive professional. Don't we wish! For a couple of years, I made so little money that every time I paid taxes, the IRS sent it all right back. One year they even sent back more than I paid! Those years were tax time Shangri-La. But then the next year, I got a really lucrative writing gig, and that seemed to surprise the IRS so much they kept writing and calling, telling me I still owed more. It took me two years (and counting) to clear that mess up. So starting this year, I’m on it. No late fees, no extra charges, no penalties, no extensions. I’m already researching to make sure that I’ll pay precisely what I owe and not one penny more. I hope the research I have done will also help you!
1. Penalties for not filing taxes
When I first realized there were people I knew—people I worked with even—who didn't file their taxes, it about blew my mind. Their reasons are varied, sometimes well thought-out, but never to their advantage. This is because the longer you wait, the more you owe. It’s not that the IRS will just forgive your debt if you don't file. Rather, they’ll happily tack on fee after fee, penalty after penalty, and—in time—court costs. So don't wait. File, even if you don't have the money you owe. At least that way the issue is simply one of negotiating a single payment plan rather than negotiating multiple plans for penalties and fees.
NOTE: The IRS doesn’t penalize people for failing to file if they owe YOU money. But this, of course, is not a good strategy either—unless you want to gift the IRS with free funds.
2. Penalties for late filing with an approved extension.
The IRS won’t charge you for filing an extension if you need more time to pay your taxes. You can typically get up to six months of extra time, and you can then file your taxes at any point before your extension expires. This can look like a good option in lieu of not filing at all. But, you’ll still be assessed interest on any taxes owed up until the moment you pay your total tax bill. The interest assessed is typically 0.5% of the total, unpaid balance. The point of the extension is to give you more time to prepare an accurate return not to give you more time to pay. So your best bet is still to pay by the due date even if you need more time to prepare a detailed return. This strategy may not save you from all the penalties you’ll be assessed (i.e., if your detailed return shows you owe more, you’ll still need to pay this extra amount plus interest) but it can reduce potential interest and penalties as well as show the IRS you’ve made a good effort to pay on time.
NOTE: If you can estimate closely enough so that you pay at least 90% of what you think you owe, and you’re right, all you’ll likely owe will be the remaining 10% balance, without extra late payment or accrued interest fees.
3. Penalties for filing without an approved extension
If you don’t file an extension and you don’t pay your personal income taxes by April 17th, you face stiffer penalties. You’ll begin to pay 0.5% interest on what’s owed, which, nastily, starts April 18th. Plus, an automatic late fee of 0.5% of the total amount owed will accrue monthly.
NOTE: No matter how late your payment is, the IRS website states that the total accrued, late-filing penalties won’t exceed 25% of your unpaid balance.
4. Failure to pay for 60 days
If you do file, but you don’t file an extension and your return arrives more than 60 days after the April 17th deadline, you’ll pay a minimum penalty of either $135 or 100% of what you owe.
NOTE: This amount, like all penalties and interest charges, may change annually, so it’s important to check the IRS website for the latest information.
5. Failure to pay after a demand or lien is issued
If you still don’t pay your taxes after the IRS has issued a written demand for payment and/or a lien against your property, interest will be assessed on the unpaid balance and will accrue at 0.01% monthly.
6. Penalty for paying with a bounced check
Hopefully you’re familiar with the IRS ePay system, which can help you sidestep any issues with prompt delivery and receipt of your payment via U.S. Mail. But if you still need to pay with a check for any reason, make sure it doesn’t bounce! If you pay with a bounced check, the IRS will assess a penalty amounting to either $25 or 2% of the total check amount—whichever is lower.
A possible “get-out-of-penalties free” card
The IRS offers the possibility of special dispensation (i.e., waiver of fees, penalties, and/or interest charges) if you can show reasonable cause for why you were unable to pay. Listed causes on the IRS website include military service and being out of the country. If the IRS authorizes special dispensation for other reasons, such as for individuals residing in areas involved in a natural disaster, the IRS website will list details for how to qualify.
Additional IRS resources
As always, there are infinite nuances to the (hopefully) fairly straightforward-sounding penalty rules listed here. For the most accurate details, always consult the IRS website. Here are a few pages from the IRS that can really help.
- Avoiding Penalties and the Tax Gap
- Eight Facts on Filing Late and Late Payment Penalties
- ePay Options Home Page
- Tips for Taxpayers Who Can't Pay Their Taxes On Time
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