Understanding Late Filing Penalties and Interest

By: Robert Thomson Click author's name for more of his/her articles

No one necessarily enjoys filing their taxes at the end of the year, but it's important to understand the risks you assume and additional charges you may incur if you don't get your forms filed by April 15.

Not only can penalties and interest apply if you don't pay any taxes you owe on time, but also the amount will continue to grow as long as you ignore the problem. You can avoid penalties and interest by filing on time every time, paying any owed taxes in full at the time they are due, or filing a tax extension to gain additional time to file your tax return.

Notices Received from the IRS

When the IRS does not receive your tax payment, or if you write them a bad check for your amount owed, they will most likely send a notice of penalty charges and interest. These notices include various codes that may be listed as the following:

- Filing and Paying Late, Underpayment or Late Payment of Estimated Tax, and Dishonored Check

- Fraud, Negligence, and Paying Late

- Missing Taxpayer Identifying Number and Interest

- Fraud-Late Filing, Penalty on Tips, Examining Officer's Report, and Overstatement, Understatement, or Accuracy Related Penalty

Penalty Calculations

If you simply file your return late, the amount of your penalty is calculated by the number of months your filing was past due. To the IRS, even a partial month counts as a full month. So, if you file and pay your taxes on April 30th, you will still be charged penalties for being late by one month. Currently, minimum penalties are either $135 or 100% of the tax due, whichever is less. Penalties may also be calculated as 5% of the amount owed for each month they are past due.

Writing a bad check for your taxes will also result in a penalty. If your check was written for more than $1,250, you will be charged an additional 2% penalty. Anything under this amount may be charged either $25 or the check amount, whichever is less.

Interest Charges

The IRS calculates interest based on the due date of your tax return, regardless of extensions filed. Any penalties included in your amount owed are also included in interest calculations, only compounding the problem. This interest will continue to accrue until you pay the amount due in full.

The hardest part about estimating interest charges is that the rates charged by the IRS are variable and typically change on a quarterly basis. In the last ten years, this rate has varied from 6% to 9%.

In addition, the amount of tax you owe can affect interest you will accrue. Any amount owed totaling $100,000 or more must be received within ten days of receiving a notice from the IRS. Amounts under $100,000 have to be received by the IRS within 21 days of this type of notice.

All interest charged by the IRS is compounded daily. This means that when compared to being compounded on a monthly basis, your interest charges multiply much faster as interest is charged daily versus only once a month.

The Good News

If you plan on filing on time but can't pay any taxes owed at the same time, there are some options you have to avoid paying worst-case-scenario fees. The IRS will provide a taxpayer with a lower interest rate being charged on the amount they are owed when this occurs. This is meant to motivate you to at least continue to file on time, even if you can't afford to pay your taxes immediately.

The IRS will also often offer an installment agreement to allow you to slowly pay down your debt to them. There may be a minimum monthly payment you are forced to make, but this can also relieve some of the pressure when you owe a sizeable amount. However, you must remember that the amount owed will continue to accrue interest as long as you still have a remaining balance.

Your Options

As soon as you know you may have a problem filing or paying your taxes on time, you need to take action. Waiting until the last minute never helps the situation, and you will be far less likely to reach an agreeable arrangement. Filing an extension can prevent penalties for failing to file, but you may also need to address how you will pay your debt as soon as possible. Many times, borrowing money from a financial institution will provide a much lower interest rate than you will end up paying the IRS.

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