April 15 is sketched into the brain of every adult. It’s Tax Day! You’re either looking at the frantic filers aiming to complete their returns before midnight or you are the frantic filer. It’s that simple. And if you’re reading this, we’re going to assume that you’ve either been the frantic filer or know a frantic filer.
Don’t fret. The IRS gods have given you mercy and want to help you out. Fully aware that everyone won’t make the April deadline, they only have one request: file an extension. An extension automatically extends the due date, not the payment date, to October 15. If you don’t owe, then you’re good! However, the IRS has a low tolerance for taxpayers who avoid them and/or pay them late. The IRS’ answer to these types of taxpayers: PENALTIES and INTEREST. Let’s take a quick look at what types of penalties and interest you might be facing.
Scenario #1 – You file your taxes late.
The minimum failure-to-file penalty is $215 if you file your taxes 60 days after the due date. If you owe less than $215, then the penalty is 100% of your unpaid taxes. I know what you’re thinking—a $215 penalty isn’t bad, right? It’s not, but remember it’s the minimum penalty. A penalty of 5% of your unpaid taxes can be assessed for every month that you don’t file your taxes. And the maximum penalty can be as high as 25% of your unpaid taxes!
Scenario #2 – You pay your taxes late.
The failure-to-pay penalty is generally 0.5% of your monthly unpaid taxes. Just like the failure-to-file penalty, this penalty maxes out at 25%. The IRS does give you a little grace if you set up a payment plan with them. What this means is that they will only assess a 0.25% penalty on lucky you! And if you pay at least 90% of your taxes when you file an extension on April 15, the IRS most times won’t assess a late-payment penalty at all. But, please make sure you pay the remaining 10% when you file your actual tax return by October 15 to remain in the IRS’ good graces.
Scenario #3 – You go for the gold—file your taxes late and pay your taxes late.
The maximum combined penalty for filing and paying your taxes late is 5% of your monthly unpaid taxes. Period.
You can get some penalty relief, if you:
- prove reasonable cause for not filing your tax return or paying your taxes timely,
- qualify for the First Time Abatement program, or
- have a statutory exception due to erroneous written advice from the IRS.
However, the IRS offers no interest relief for taxpayers. Interest is charged on unpaid taxes, penalties, and interest that you already accrued because you didn’t pay your taxes and penalties. And this interest keeps accruing until all unpaid taxes, penalties, and interest are paid in full. Remember, penalties and interest start accruing the day after the tax deadline. The sooner you pay, the more money you save. And who doesn’t love to save money!
Have you ever had any of these penalties assessed? Tell us about your experience and how it was resolved.