Income Tax Late Penalty Rates

The Internal Revenue Service (IRS) will assess a late tax penalty on any individual or business who does not meet tax obligations in full by the required date of April 15 of the year following the year for which the return is filed. For example, if you are filing your 2010 tax forms, you must file and pay by April 15, 2011. Otherwise, you will be subject to a set of costs depending on the circumstances that can amount to large fees due to failure to file penalties, failure to pay penalties, and interest penalties. 

Failure to File

If you do not file your return on time, you will be subject to the highest penalties the IRS can issue against you. The penalty schedule is as follows:

  • 5 percent each month beyond the April 15 date
  • 25 percent maximum
  • The penalty does not compound or revolve

The percentage is calculated against your individual tax obligation. So, if you owe $1,200 in taxes this year but fail to file until June 20, for example, you would be charged the $1,200 plus 5 percent in May and June. This would amount to an additional $120 on top of your individual obligation, bringing the taxes you owe to $1,320. It is not hard to imagine how this penalty could grow to a very large amount for an individual with a higher obligation. 

Failure to Pay

If you file your taxes but do not pay, you will be subject to a much lower penalty schedule as follows:

  • 0.5 percent per month on the unpaid amount
  • No maximum penalty limit
  • The penalty does not compound or revolve

This fee is clearly much lower than that assessed for the failure to file. In the same example above, if you had simply filed your taxes but waited to pay, you would only be charged a $12 penalty over the two-month late period, bringing your total owed to $1,212. Still, if you owe a very large sum, the 0.5 percent fee can add up quickly.

Interest

In addition to penalties, you will also owe the IRS interest based on the amount you did not pay. This interest is variable depending on the quarter. Typically, it is a percentage point or two above the prime level. The interest does not compound or revolve, but it is charged on a day-by-day basis. As a result, in the example above, you could be assessed $48 in a year when the interest charge was only 4 percent. Again, this can add up with a larger payment owed.

How to Handle Late Taxes

Even if you do not think you can pay your taxes immediately, file your taxes on time. This will release you from any potential high charges for a late filing. Once you have filed, begin making any payments you can. Late payment fees and interest are assessed on your remaining balance not your principal owed. Therefore, reducing this balance will reduce your fees each year. It can take years to pay off a very high tax burden, but the more you can reduce each month the lower your penalties will be.

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