Penalties for filing taxes late are deliberately set high enough to encourage taxpayers to file in a timely manner. On top of that, the IRS can impose a third penalty by tacking on interest to any unpaid taxes.
Making a best-guess estimated tax payment might be the best option for taxpayers who wish to avoid any late-tax-related penalties. Either way, make sure you know the penalties you might face and seek help for filing taxes late.
Penalties for Filing Your Taxes Late
Taxpayers who do not pay their taxes on time are subject to a failure-to-pay penalty. In addition, taxpayers who file taxes on time but do not pay the taxes they owe will also be fined. Here are a few penalties for being late on your taxes:
Paying the Late Filing Penalty
The failure-to-pay penalty is one-half of 1 percent each month payment is late, up to 25 percent, according to the IRS. The penalty accrues at 5 percent each month that the tax filing is late, up to 25 percent. But, the penalty can be reduced to one-quarter of a percent if the taxpayer files a return and requests an installment payment plan to repay their debt in full.
If both the failure-to-file penalty and failure-to-pay penalty apply in the same month, the maximum penalty that will apply is 5 percent. Taxpayers can avoid these late filing penalties by filing on time or filling out the appropriate paperwork for an extension. The late filing penalty will apply even if it turns out the taxpayer is due to receive a tax refund.
Paying Back Interest on Unpaid Taxes
For a taxpayer who owes unpaid taxes, interest will accrue on the amount owed in addition to the penalties covered earlier. This interest penalty compounds daily and is charged at a rate equal to the federal short-term rate plus 3 percent. There is no minimum or maximum amount of interest charged as the IRS will continue to charge interest until you pay the balance in full.
As an example, consider a taxpayer who fails to file their taxes when due on April 15. Assume the taxpayer files his taxes on June 15 and owes the IRS $2,000:
- This taxpayer will be assessed a failure-to-file penalty of 5 percent for each month.
- Next, a failure-to-pay penalty will be assessed at half a percent each month, including the partial month of June.
- Last, interest will accrue on the unpaid taxes and compounds daily, at a rate of 3 percent above the federal short-term rate, beginning the day after taxes were due.
How to Avoid a Penalty for Filing Taxes Late
The IRS allows all taxpayers a one-time, six-month filing extension — with no reason required. During this extension, the taxpayer will not incur a failure-to-file penalty. However, the failure-to-pay penalty and interest on unpaid taxes will still be charged.
The tax due date is typically April 15, unless this date falls on a weekend or holiday. In 2018, all 2017 tax returns are due on Tuesday, April 17, because the 15th falls on a Sunday and District of Columbia celebrates Emancipation Day on April 16.
Cynthia Measom contributed to the reporting for this article.