The Internal Revenue Service charges you interest on money you owe it just like any other creditor. The IRS also has the ability to assess penalties for nonpayment. Although in very rare cases you may be able to negotiate the amount of your debt down, there's almost no way to avoid paying your back taxes. Even bankruptcy won't usually discharge a debt you owe the IRS.
If you don't pay all you owe when you file your taxes, the IRS will send you a bill. Even if you don't receive the bill for months, the IRS will assess interest charges beginning on April 15th of the year you filed your taxes. The rate charged is the federal short-term rate plus 3 percent, an amount that changes quarterly. As of the second quarter of 2012, the IRS interest rate was 3 percent. Interest on your debt is compounded daily until you pay your taxes in full or the penalty reaches the maximum amount of 25 percent.
In addition to the interest on your tax debt, the IRS will assess you an additional late payment penalty of one-half of 1 percent of the amount you owe until your debt is paid. If you file an installment agreement, which is a monthly payment plan, this penalty drops to one-quarter of 1 percent monthly. If you owe tax and don't file a tax return, you'll face a late filing penalty of 5 percent of the amount you owe for every month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $135 or 100 percent of the tax owed.
If you are an active member of the armed forces serving in a combat zone, you may be able to postpone your filing date and avoid interest and penalties. Certain U.S. citizens and permanent residents working overseas can also get an exception to filing and payment deadlines. If you can demonstrate a reasonable cause for missing your filing or payment deadlines, you may be able to reduce your penalties. However, even in that case, the IRS will continue to assess interest charges on your balance.
If you file bankruptcy, a legal principle known as the "automatic stay" prevents all creditors, including the IRS, from collecting on a debt. However, the IRS can continue to assess additional interest and penalties on your tax debt over the course of your bankruptcy, even during the period of the automatic stay. Additionally, unless your tax debt is at least three years old and meets other criteria, you must still pay it even if you get a bankruptcy discharge.
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