IRS Late Payment Penalty: Tax Penalties For Paying Late

failure to file penalty

The Internal Revenue Service (IRS) adds penalties on taxes owed that have not been paid on time. Filing your taxes late can cost you in the long run, unless you have a refund. If you have a refund owed to you there is typically no penalty fee associated with filing your taxes late because there is no amount due to the IRS, rather they owe you money. The amount owed, interest and penalties associated with late or back taxes can turn out to be a significant sum of money.

The Penalties & Interest

There are two separate penalties that may be applied to your balance depending upon your filing status. Interest will also be tacked onto your unpaid tax balance.

  • Interest. Interest rates are applied to all late tax payments. The IRS interest rates are set quarterly and are variable, which means they change every three months. Interest is added to your balance for every day your taxes are not paid in full. This interest starts at the deadline when taxes are due to the time you actually pay them.

  • Failure to Pay. This is the penalty that will be applied if you filed your taxes but did not pay them. This penalty is calculated at 0.5% for each month the tax bill is not paid in full and is calculated based on the amount of your owed taxes.  The maximum penalty for the failure to pay penalty is 25%.

  • Failure to File. This penalty will be applied if you did not file and did not pay your taxes. This penalty is calculated at 5% of your tax balance due for every month that you are late filing your return. The 5% is applied starting from the time of the deadline to the date that you actually file your return. The maximum penalty is 25%.

  • Combined Penalty. This is the penalty that you will likely be charged with if you have unfiled and unpaid taxes. This penalty is 5% a month, which is a combination of the failure to file and failure to pay penalties. When the combined penalty is charged the IRS reduces the failure to file penalty by .5%, which makes an even 5% a month combined. The maximum that the combined penalty can be is 47.5% of the original tax amount owed.

Exceptions

Standard penalty fees are applied only for cases that are not associated with any type of income tax fraud or suspected negligence. If the IRS has just reason to believe that tax fraud is the reason for the late or failure to file there may be a heavy penalty associated with those cases.  Typically in cases of fraud the penalty percentages are multiplied and can reach a maximum fine of 75% of the tax bill.

Reasonable Cause

Despite the IRS being a feared entity they are understanding when individuals can provide a reasonable cause for either failing to file or together or filing past the April 15th deadline (4/17 for 2012) without an approved extension. A reasonable cause explanation to the IRS can and often will result in a removal or reduction of the penalties charged. This is done on a case by case basis after review of the circumstances by the IRS.

Penalty abatement must be filed before the IRS will consider removing the penalty or charge from the tax bill. It is reported that about 1/3 of the penalties that are charged to individuals who either failed to file on time or at all are removed if the filer can prove that they have a reasonable excuse for their inaction.

The best prevention against owing the IRS money is to pay your taxes on time. The standard day for filing taxes is April 15th (4/17 for 2012) unless you file an extension ahead of time. Filing an extension may minimize the penalties that are tacked onto your tax bill. Working with the IRS directly on alternatives BEFORE you are late with your taxes can save a great deal of time, stress and money in the long run.

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