The Punishing Costs Of Paying Your Taxes Late

Why You Don't Want to Owe the Internal Revenue Service

The Punishing Costs Of Paying Your Taxes Late
April 12, 2019

Examples of really bad ideas: Forgetting your spouse’s birthday, do-it-yourself brain surgery, forgetting your anniversary, and neglecting to file your federal tax return or pay your federal taxes. You may be short on the cash to pay your taxes, but there are better ways to address your tax problem than avoiding it entirely.

The IRS considers failure to file a more serious situation than failure to pay, and the penalties are appropriately greater. Failure-to-file penalties typically accrue at the rate of 5% (4.5% late filing and 0.5% late payment) of your unpaid taxes each month (or partial month) that the return is late, up to 25% of the total taxes owed. If the tax filing is overdue by more than sixty days, you will incur a minimum penalty of $210 or 100% of your unpaid tax, whichever is less.

That is just the penalty payment – you still have to deal with accrued interest on the unpaid taxes from the due date until the date of payment (at the federal short-term rate plus 3 percentage points, which amounted to 6% for the first and second quarter of 2019.

You may be able to get an extension on filing your taxes for up to six months. You may also qualify based on technical problems – for example, if you are paying electronically and the routing number supplied by your bank is incorrect.

To apply for an extension in almost all cases, you must file IRS Form 4868 prior to the April 15th filing date. However, even if you get an extension to file your tax return, you are still responsible for paying your taxes on the original due date. "Filing for an extension doesn't get you an extension to pay," says Betterment Head of Tax Eric Bronnenkant. "Let's say you don't pay by April 15th, well then, you're still going to have to pay interest on that money later, anyway. Filing for an extension is typically a good idea if, let's say, you haven't gotten all your tax documents, you've been working overseas and you didn't get all the information you needed from your employer, or you've got a complex tax return and you're investing in complex investments. Those are good reasons to request an extension. Requesting an extension doesn't solve any problems, if your only problem is that you expect to owe money."

To allow for some payment latitude for estimates, the IRS usually waives the failure-to-pay penalty if you pay at least 90% of your taxes before the original due date and you pay the rest by the end of the extension. If you file electronically and use the IRS electronic payments options, you will not need to submit a paper copy of Form 4868 – the extension will be automatically processed.

Should you incur a failure-to-pay penalty, the charge is 0.5% per month or partial month that the charge is outstanding and is limited to 25% of the total taxes owed. Of course, interest continues to accrue indefinitely until the bill is paid.

The IRS is not interested in punishing those who fail to pay – they would much rather have the money. As a result, you may be able to work out installment plans or other payment schedules that reduce your penalties.

In a small gesture of goodwill, when the failure-to-file and the failure-to-pay penalty both apply to the same month, the failure-to-file penalty is lowered by the amount of the failure-to-pay penalty. However, the minimum penalties still apply in that case.

Make sure that you file your federal taxes on time. If there is a legitimate reason that you cannot, get an approved extension as soon as possible, make the necessary payment of estimated taxes, then work out payment terms with the IRS to minimize any damage.

Not being up-to-date with the 2017 Tax Cuts and Jobs Act is no excuse for filing your taxes late. Check through our list of tax articles for any changes that may affect you and if you need more time, file for an extension.

Dream of taking your tax money and fleeing to a far-off foreign beach if you like, but remember that it is only a dream. You're better off coming back to reality and paying your taxes.

Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.


Photo ©iStockphoto.com/Mehaniq

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