We all know that we should file our tax returns and pay any additional taxes owed on time. The major reason is because the Internal Revenue Service (IRS) levies penalty fees and interest for late filings and payments, which start accruing immediately after the due date of the tax return. The good news is that those penalty fees are standardized and can be calculated and accounted for, should you need to file your tax return or send your payment late. The better news is that both penalties and interest stop accumulating once you pay off your balance.
Unsurprisingly, the best option is to always file your tax return on time and pay your balance in full by the due date, generally April 15. If you can’t file on time, you should apply for an extension. If approved, you will have an additional six months (typically, until Oct. 15) to file your tax return.
On the other hand, the payment of any additional taxes must be done by the due date, even if you get an extension to file your tax return. If you can’t pay your balance in full on April 15, try to pay whatever you can manage as soon as possible. Penalties and interest begin to accrue right away, so it is important to pay as much as you can by the due date. For the remainder of the balance, you might qualify for an installment agreement, which may help you reduce the rate at which penalties accrue.
Below, we’ll take a look at some of the most common penalties the IRS may charge and how they are calculated. That way, if you have to file your tax return or send your payment in late, you will know ahead of time how much you owe in penalties and interest so you can budget accordingly. Knowledge is power, and in this case, it can also save you money.
The four most common penalties the IRS may assess are as follows:
Failure to file
Failure to pay taxes reported on the original report
Failure to pay proper estimated tax
Dishonored check or another form of payment
*If you were assessed Failure to File AND Failure to Pay penalties, the total penalty will not exceed 25% for both.
Interest on any unpaid taxes is compounded daily and starts accumulating one day after the due date of the return and continues to accumulate until the bill is fully paid off. The interest rate is calculated every quarter and is equal to the federal short-term rate plus 3%. Check for the current interest rate.
Even if you file your tax return or send your payment in late, you might qualify for removal of some or all of the penalties. That is particularly true if you can show you filed or paid late because of a reasonable cause, rather than willful neglect, or if you can show you tried to follow the requirements but couldn’t fulfill your tax obligations.
As with anything, it is important to be diligent and file your tax return and send in your payment (if an amount is owed) on time. However, it may not be possible to do one or both of those things in a timely manner. The important thing to remember is not to despair and to approach the situation with the full knowledge and awareness of the penalties you likely face.
At the very least, you should start by filing the tax return on time or requesting an extension. Next, pay as much as you can by the due date, and then work with the IRS on an installment plan to pay the remainder, which could lower any fees. Finally, research your options to see if you can qualify for assistance from some or all of the penalties. Don’t hesitate to contact back tax assistance specialists at Solvable, whether for a quick consultation or help with resolving your tax financial issues altogether.