Generally, April 15th is the deadline for most people to file their individual income tax returns and pay any tax due. During its initial processing, the IRS checks for mathematical accuracy on your tax return. When processing is complete, if you owe any tax, penalties or interest, you’ll receive a bill which you’re responsible for paying. Interest and penalties can add up quickly if you don’t pay the full amount right away.
Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily!
The three most common penalties include:
Failure to file – when you don't file your tax return by the return due date or extended due date if an extension to file is requested.
Failure to pay – when you don't pay the taxes reported on your return in full by the due date, April 15. An extension to file doesn't extend the time to pay.
Failure to pay proper estimated tax - when you don’t pay enough taxes due for the year with your quarterly estimated tax payments when required.
Failure to File
If you owe tax and don't file on time, there's a penalty for not filing on time. The failure to file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $205 or 100 percent of the tax owed.
You must file your return and pay your tax by the due date to avoid interest and penalty charges. Sometimes, you can borrow the funds necessary to pay your tax at a lower effective rate than the combined IRS interest and penalty rate.
Electronic payment options available on the IRS Payments page are the most convenient ways to pay your federal taxes. However, if you decide to pay by mail, be sure to return the tear-off stub on your bill and use the return envelope provided. In order to make sure your payment credits properly to your account, ensure you:
Make your check or money order payable to the United States Treasury
Enter the primary social security number or employer identification number
Enter the tax year and form number
Ensure your name, address, and telephone number are on the payment
Don't send cash
Failure to Pay
If you file a return but don't pay all tax due on time, you'll generally have to pay a late payment penalty. The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full.
The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.
There are some exceptions to the general deadlines for filing a return and paying tax, such as:
If you're a member of the Armed Forces and are serving in a combat zone or contingency operation. Refer to Publication 3, Armed Forces' Tax Guide, for additional information and qualifications.
If you're a citizen or resident alien working abroad. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for details.
If you were a victim in certain disaster situations. In those situations, the IRS has the authority to extend filing and payment deadlines. Search keyword "disaster" on IRS.gov for more information.
Failure to Pay Estimated Taxes
The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding from your employer or by making estimated tax payments if you’re self-employed or own a small business. If you don't pay your tax or you pay an insufficient amount of tax through withholding, you might also have to pay estimated taxes. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. For more information, refer to Publication 505, Tax Withholding and Estimated Tax.
Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.
The law allows the IRS to waive the penalty if:
You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.
It's important you review all IRS notices and bills in detail. If you believe there's an error, write to the IRS office that sent it to you within the time frame given or call the number listed on your notice or bill for assistance. You should provide photocopies of any records that may help the IRS correct the error. If they find a mistake was made, they'll make the necessary adjustment to your account and send you a corrected notice.
William D. Truax, E.A. and his friendly team of licensed tax preparers have been helping individuals manage their tax payments and penalties for over 30 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.
If you need assistance or have questions about a noticed you’ve received or penalties you may owe, please contact us today for a FREE consultation. We’re here to help!