Late payment is not the only condition when the IRS penalizes tax holders. The central tax authority may also penalize those who file their taxes after the deadline. If you owe taxes, and fail to file them in time, it may lead to interest and penalties. However, if you are due for a refund and fail to timely file your tax return, there will be no penalty from the IRS. This blog post discusses five facts about late tax filing and payment penalties every taxpayer must know. Take a look.
1. Possibility of Two Penalties
The first important fact that all taxpayers need to know is that, if you owe any tax when filing a late tax return, the IRS may charge you with two penalties. First, they may charge you with the “failure-to-file” penalty for late filing, and second, the “failure-to-pay” penalty for not settling your pending taxes before the due date.
2. Late Filing Penalty
Applicants who file their tax returns after the due date are charged with a penalty of 5 percent per month. Although this amount accrues every month, it doesn’t exceed 25 percent of the tax holder’s total unpaid taxes. If the applicant files the tax return 60 days after the due or the extended due date, the failure-to-file penalty is 100 percent of the total unpaid taxes or $135, whichever is smaller. If a person’s total unpaid taxes, for instance, are $200, and they file the tax return 60 days after the deadline, the failure-to-file penalty would be $135.
3. Late Payment Penalty
The late payment penalty is usually 0.5 percent of the debtor’s total unpaid taxes. The amount, like the late filing penalty, accrues every month after the due date for tax payment. The payable amount can go up to a maximum of 25 percent of the total unpaid taxes. Furthermore, the taxpayer might also be liable to bear interest rates, if they fail to settle their due balance in full. During FY 2016-2017, the interest rate for underpayment of taxes is 3 percent.
4. Combined Penalties Per Month
If the IRS finds a taxpayer guilty of both the penalties – “failure-to-file” and “failure-to-pay” – the maximum penalty for one month is usually 5 percent of the total unpaid taxes. Whether the IRS charges the debtor with both these penalties varies from case to case. Here are two examples:
Case (A)
You filed a tax return, but expect a refund
- No penalties
- You’d have 3 years from the year you didn’t file a tax return to claim your refund. After that period, the refund money will go to the government
Case (B)
You filed a tax return on time, and owe unpaid taxes
- Failure-to-pay penalty may apply
- The minimum penalty would be 0.5 percent and the maximum 25 percent of the total unpaid taxes
5. Exceptions to Late Payment Penalty
If an applicant has paid 90 percent of their taxes and requests an extension of the due date for filing their income tax return, the IRS may exempt them from failure-to-pay penalty. The debtor, however, will have to bear interest charges on the unpaid taxes, if they file their tax return after April 15 during the current financial year.
6. Situations for No Penalties
A taxpayer can avoid failure-to-file and failure-to-pay penalties, if they are able to prove there was a justified reason for not paying their taxes. If the person, for instance, has been a victim of a flood, storm, or any other natural calamity, they will not have to bear any late filing or late tax payment penalties.
The Takeaways
Even if a person does not have the means to pay their taxes in full, they need to file their tax return every year. That is because the “failure-to-file” penalty can be up to 10 times more than the “failure-to-pay” penalty. Moreover, taxpayers can also request a payment agreement with the IRS to settle their tax liabilities and avoid penalties. To learn more about how to avoid tax penalties or address any other IRS tax debt issues, please call the Law Offices of Nick Nemeth at (972) 426-2553, or fill out our contact form.
