Can’t Pay Your Tax Bill? Here’s How Much It Will Cost You in Interest & Fees
According to U.S. News & World Report, a record number of Americans (19 million) filed extensions this year, pushing their filing due date past the standard April 18 deadline. The media outlet spoke to an expert who cited a number of reasons for the hike in extension requests such as, “COVID-19 business credits and adjustments, constant tax law changes over the past few years and simply needing more time to get the required paperwork organized.”
The IRS extends the final deadline under certain circumstances, which may include natural disasters — such as anyone facing hardship after Hurricane Ian. Those affected by Hurricane Ian now have until Feb. 23, 2023 to file, per U.S. News & World Report.
If you are having other hardships, you can also submit a letter in writing to the IRS explaining the situation. The IRS will consider such requests on a case-by-case basis.
In most situations, the IRS still expects taxpayers to pay what they owe by April 18. For those who requested an extension, the government expects you to estimate the amount to the best of your ability. You will then receive a refund for any overpayments — or a bill for the amount still owed.
Those who have not submitted payment by April 18 face a failure-to-pay fee which equates to 0.5% of the total tax amount owed for each month that goes by after Tax Day (and this fee can accumulate up to 25% of the total sum owed).
There are also interest charges that will be assessed for this unpaid amount: 3% plus the federal short-term rate. As of now that figure is 6% a year. Using the example above for $1,000 owed, interest would be an additional $30 for that 6-month period (assuming 3%, or half of the year’s annual interest rate of 6% is applied) if you file by Oct. 17.
Failure-to-File Penalties and More
If you don’t file the extension paperwork by the deadline, there will be an additional failure-to-file penalty applied to the tax balance owed: 5% per every month it’s not paid. This penalty will be retroactive to Tax Day.
This mostly applies to freelancers, self-employed individuals and businesses that are required to pay quarterly taxes every year since their taxes are not taken out automatically.
The best idea is to work with a certified financial planner who can help estimate appropriate quarterly payments in order to avoid penalties. Calling the IRS to explain the situation if you can’t file or pay on time — so they can work with you to find a manageable financial solution for your tax debt — may also be prudent.
If you can’t make the full payment when filing the extension paperwork, a payment plan can be set up with the IRS. However, any applicable interest and penalties or fees will apply until the balance is met in full.
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