When you owe the Internal Revenue Service back taxes, it’s best to be proactive about the debt. The IRS exacts penalties for late payments in the form of interest that compounds daily. Ignoring this debt won’t make it go away -- in fact, you stand to lose significantly if you don’t resolve the taxes you owe.
The IRS charges a penalty for failure to file of 5 percent of your unpaid tax amount for every partial or full month past the tax due date. The failure-to file-penalty won’t go over 25 percent of the tax amount due. Waiting more than 60 days past the tax due date will result in a penalty of $135 or 100 percent of the unpaid tax, whichever is smaller.
Interest will accrue for back taxes owed to the IRS. The IRS sets interest rates equal to the federal short-term rate plus 3 percent, compounded daily. The IRS adjusts the interest rate every three months to keep it current. The penalty for filing your return on time but not paying your total tax due is 0.5 percent for each partial or full month until you pay your taxes in full, up to 25 percent, until you finish paying your taxes completely. If the IRS issues a notice of intent to levy, and you allow 10 days to go by, the interest rate rises to 1 percent.
Sometimes taxpayers have failure-to-file and failure-to-pay penalties simultaneously. When this happens, the IRS combines the penalties to 5 percent (4.5 percent for late filing and 0.5 percent for late payment) for every partial or full month, not exceeding 25 percent. After 60 days without filing, the minimum penalty will be $135 or 100 percent of the tax due, whichever is less. If five months go by without payment, the failure-to-pay penalty will accrue until it reaches 25 percent.
If You Can’t Pay
The IRS has options for taxpayers unable to pay taxes. You can apply for an installment agreement to make smaller tax payments over time as long as you have filed your tax return. Interest and penalties will accrue during an installment agreement. You can also request an offer in compromise to settle your tax debt for less than you owe. The IRS charges an application fee, but you might get this waived if you meet qualifications. You also might request that the IRS delay collection, which could give you more time to pay your debt.
The IRS offers some taxpayers penalty relief. If you meet qualifications for unemployed status and income, you can receive a six-month grace period from failure-to-pay penalties. File Form 1127A to apply for penalty relief.
- Internal Revenue Service: Failure to File or Pay Penalties: Eight Facts
- Internal Revenue Service: IRS Notices and Bills, Penalties and Interest Charges
- Internal Revenue Service: Collection Procedural Questions
- Internal Revenue Service: The IRS Collection Process Publication 594
- Internal Revenue Service: IRS Offers New Penalty Relief and Expanded Installment Agreements to Taxpayers under Expanded Fresh Start Initiative
- IRS Late Fees & Penalties
- Penalty for Failure to Report Income on Tax Return
- What Happens If Your Taxes Are Past Due?
- How to Calculate the Late Penalty for Filing Taxes
- How Long Do You Have to File if the Government Owes You Taxes?
- Interest & Penalties on an Amended Tax Return
- How to File Past Year Tax Returns
- How to Calculate IRS Late Charges