The IRS doesn’t very much like it if you don’t pay your taxes on time. They’re not so understanding either if you’re unable to pay what you owe. To help deter people from paying taxes late (or not paying them at all), and to help cover their administrative costs, the IRS charges penalties and fees.
Some of those penalties include:
1) If you haven’t filed or paid your taxes due.
You will most likely owe a late filing penalty in addition to a late payment penalty. It’s charged on a monthly basis and is generally around 5% for every month you’re late. Once you’ve reached five months, it jumps to 25% until you’ve paid your taxes. So if you haven’t filed yet, file as soon as possible to avoid extremely high fees.
2) If you filed on time but didn’t pay all of your taxes due.
A late payment will be assessed on the tax you owe each month. The late payment penalty is .5% of what you owe. The .5% rate increases to 1% based on the number of notices the IRS has sent to you.
If you can show reasonable cause for your failure to pay, they may not charge a penalty fine.
3) Installment options are available. If you file on time and request an installment plan for your payments and the IRS accepts it, you may have to pay administrative fees. If you file late and request an installment plan, the fees are higher.
4) Interest. The IRS is like any other entity. If you owe them money and cannot pay on time, then they charge you interest. However, unlike high rate credit cards, payday loans or other such establishments, the IRS charges reasonable interest rates. They want to present a deterrent to not paying your taxes on time. And they want their money. However, at the same time, they don’t want people to go broke because they’re late on their taxes.
That being said, the interest is calculated based on how much you owe and calculated each day your balance is not paid in full. It’s a variable interest rate that is set quarterly.
5) If you’re going to owe and you’re unable to pay what you owe, file an extension. That way you’re not penalized and being charged interest and fees. And hopefully by the time your extension runs out, you’ve saved enough money to pay your taxes in full.
Taxes are part of life. Planning ahead and preparing for them is the best way to eliminate and avoid any extra out-of-pocket expenses. File on time or file an extension and if you owe money to the IRS, do everything you can to pay it on time.