If you do not submit your tax payment on April 15, then the IRS begins to charge penalty fees and interest on your tax liability right away. Even if you have applied for an extension to file your tax return, you remain responsible for paying your tax on time or face additional charges. The IRS does have a program in place to apply for an extension to pay, but if you have not applied and been approved for it, then you will find additional charges added to your tax bill starting on April 16.
Late Filing Penalty
If you submit your tax return late without filing for an extension, then you will be charged a penalty fee for late filing. This amount is 5 percent of the tax owed, up to a maximum of 25 percent of the entire tax, for every month or partial month for which you are late. If you submit your return more than 60 days after your due date or extended due date, then the IRS charges a minimum failure to file penalty of either $135 or 100 percent of the unpaid tax, whichever is the smaller amount.
Late Payment Penalty
Even if you file your tax return on time, either by April 15 or the October 15 deadline if you requested an extension, if you do not pay your taxes by the original April 15 due date, then you will be charged a late payment penalty, also known as a failure-to-pay penalty. This will be .5 percent of the tax per month or partial month and begins the day after you are late. If the IRS has contacted you several times and you have received a final notice of intent to levy or seize property, then the interest rate increased to 1 percent per month. The maximum you will be charged is 25 percent of your total tax liability.
If you do apply for an extension to file and you pay at least 90 percent of your tax bill, then you may avoid a failure to pay penalty. The main caveat is that you must pay the remaining balance by your due date from the extension, which is typically October 15. This is why it is important to estimate your taxes and submit a payment if you plan to submit your return late and have requested an extension to file.
Late Filing and Late Payment
If you do not submit your tax return on time and do not pay your tax on time, then you face both penalty charges. However, you will only have a maximum penalty per month of 5 percent of the tax, rather than 5.5 percent. The total amount for which the penalties can add up to is 47.5 percent of the original tax, of which 22.5 percent comes from late filing penalty charges and 25 percent late payment of the tax. This means that if you owe $20,000 and do not file or pay for an extended period of time, then you could end up with $9500 added to your bill in penalty fees alone, not to mention the interest accrued every month.
Installment Agreement and Penalty Fees
Signing up for an Installment Agreement is one of the most popular ways to help pay down a large tax debt. Although it is a very beneficial solution for most people, the IRS continues to charge interest and penalty fees for every month that your account remains with a balance. However, it is less than what you would be charged if you did not have the plan in place. Instead of being charged .5 percent every month, you will be charged .25 percent.
In addition to charging penalty fees, any overdue tax debt is liable to interest starting the day after the tax is due. Similar to penalty charges, the interest applies even if you applied for an extension to file but not an extension to pay. The interest is 3 percent plus the federal short-term rate, which changes every three months. The last few years, the total interest has been between six and eight percent.
If you have reasonable cause for filing and/or paying late, then you can apply for penalty abatement and avoid paying these penalty fees, although you most likely will still be charged interest on your tax. If you find you owe a significant amount of money and are unsure how you will be able to pay it, there are other tax relief options in place in addition to Installment Agreements. The tax professionals at Fidelity Tax Relief will review your situation and discuss your options with you. Call us today at 877-372-2520 to start resolving your federal tax debt.