Now that the April 18th tax deadline has passed, individual taxpayers need to understand the penalties and interest that can accrue if the tax amount due was not paid by the tax deadline. There are three different penalties the IRS can assess for not paying your taxes and filing your tax return by the April 18th deadline. These include failure-to-file penalty, failure-to-pay penalty, and interest.
First, there is the failure-to-file penalty. This penalty is incurred if an individual owes tax and doesn’t file their tax return by the tax filing deadline. The penalty is generally 5% of the tax owed for each month the tax return is late, up to a maximum of 25%. If you are unable to submit an individual tax return by the April 18th deadline you must file a federal and state (if applicable) extension which will waive this penalty and set a new filing date for your tax return of October 15th.
The next penalty that one may receive is the failure-to-pay penalty. This penalty is incurred if you file a return but don’t pay all taxes owed by the tax filing deadline. The failure-to-pay penalty is one-half of 1% for each month the payment is late up to a maximum of 25%. This percentage is calculated on the amount of tax that remains unpaid at the tax filing deadline and the penalty will continue until the tax is paid in full. You can reduce the penalty by setting up an installment agreement with the IRS. This will decrease the penalty to one-quarter of 1% for any month in which the installment agreement is in effect. The penalty can also increase if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. The increase in the penalty is one percent of remaining unpaid taxes.
Finally, some interest will accrue on the amount of tax owed at the filing deadline. This interested will accrue until the tax owed is paid in full. The interest rate can change quarterly and is normally the federal short-term rate plus 3 percent. This interest compounds daily. To get further information about the current interest rates, please visit the IRS website.
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