Penalties and Interest - Consequences of Late Filing and Paying

 

Hey CPA Superhero, I am late filing my personal returns and what consequences am I looking at? In addition to paying your taxes the IRS assesses penalties for the following:

• Failure to File
• Failure to Pay
• Failure to Pay Proper Estimated Tax
• Dishonored Check

Failure to Pay

Here is the break down from the IRS:

• The maximum penalty is 25% of the tax due. 
• The rate increases from .5% to 1% per month 10 days after the IRS issues a final notice of intent to levy or seize property. 
• The penalty rate is .25% for each month or part of a month in which an installment agreement is in effect.

Failure to File

Here is the break down from the IRS:

• The failure-to-file penalty is .5% of the unpaid taxes for each month or part of a month that a tax return is late.
• The penalty won't exceed 25% of your unpaid taxes
• If both a failure-to-file and a failure-to-pay penalty are applicable in the same month or part of month, the combined penalty is 5% (4.5% late filing and .5% late payment) for each month or part of a month that your return was late, up to 25%.
• The late filing penalty is calculated based on the tax that remains unpaid after the due date. Unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits.
• If after five months you still haven't paid, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%.
• The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax. 
• If your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $435 (for tax returns required to be filed in 2020) or 100% of the tax required to be shown on the return.

Interest

Interest accrues on the unpaid balance and compounds daily from the due date of the return (without regard to any extension of time to file) until you pay the balance in full.

Here is the break down from the IRS:

• The interest rate for taxpayers other than corporations is the federal short-term rate plus 3%.
• The federal short-term rate is determined every three months.
• For the current quarterly interest rate on underpayments, search "interest rates" via our Newsroom Search or "quarter interest rates" on IRS.gov Site Search.

Incentive to file and pay in a timely manor

These are serious penalties and interest. Notice this point from IRS topic 653:

Often, you can borrow the funds necessary to pay your tax at a lower effective rate than the combined IRS interest and penalty rate.

So file and pay on time and borrow money if you need to to get it done and you probably will be better off financially and emotionally as a result.  

If you can't pay what you owe you are better off filing and paying on time. If you don't have the money get a loan to pay it and it is likely what you will pay in principal and interest will be less than paying your taxes and the IRS penalties and interest over time. 

Not filing and not paying is a really bad decision. But once you have made that decision and now you are years behind, now is the time to face up to that and take care of it before the IRS knocks on your door, oh and the penalties and interest can continue to accrue.  But if you are really behind the penalties may have maxed out but the interest continues to accrue. So in that case contact me to help you get compliant with filing and make arrangements to pay the IRS or settle with them if you can't pay everything even over time. 

Installment Agreements

In addition to the penalties you are also looking at interest on what you owe. Additionally, if you arrange an installment agreement the penalties and interest continue to accrue. In fact the IRS presents this the other way:

"Penalties and interest stop accruing as soon as you pay your balance in full."

Late Filers

Late filing does happen, in fact every year a growing number of late filers ask me to help them to get compliant with the tax filing and payment requirements. It is a tough move to make but it is even harder to continue to wait and carry the anxiety of worrying about when the IRS will catch up to you. Not only is late filing and paying difficult, but the emotions are very difficult as well. I help many people each year to get caught up. Don't procrastinate any longer. Contact me today using my email address below to arrange a consultation to help you get started.

Jeff Haywood, CPA

The CPA Superhero

jeff.jhtaxes@gmail.com

Sources:

Topic 653 IRS Notices and Bills, Penalties, and Interest Charges

IRS faqs: Will I be charged interest and penalties for filing and paying my taxes late?

Posts:

The Employee Retention Credit: Income Tax Issues

The Employee Retention Credit - Can Your Business Benefit From It?

Execution: The Employee Retention Tax Credit

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Abatement of Penalties

I previous posted an article about late filing penalties for business returns. Those penalties are significant and taxpayers often pay them not knowing it may be possible to get some relief or abatement of those penalties. 

First Time Penalty Abatement

Per the IRS you may be eligible for their First Time Penalty Abatement program if you meet the following requirements:

• You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
• You filed all currently required returns or filed an extension of time to file.
• You have paid, or arranged to pay, any tax due.

In addition to possible getting penalties abated, you may also get relief from interest on those penalties. Here is a quote from the IRS:

Interest charged on a penalty will be reduced or removed when that penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is full paid.

Reasonable Cause 

If their were circumstances beyond your control that caused you to incur penalties you may also qualify for relief. Here is a quote from the IRS:

You may qualify for relief from penalties if you made an effort to comply with the requirements of the law, but were unable to meet your tax obligations, due to circumstances beyond your control.

The same IRS post mentions the following penalties are eligible for relief:

Failing to file a tax return

Failing to pay on time

Failing to deposit certain taxes as required

Other penalties as applicable. 

In Practice

The abatement of penalties may be available to a taxpayer but in practice an IRS representative probably will not mention these provisions when discussing what the taxpayer owes. The expression "if you don't ask for it you probably won't get it" certainly applies here. There is also some nuisance strategy in applying for or requesting penalty abatement. In many cases the amounts involved may be significant. Also, even if you have paid penalties in the past you still may be able to get a refund of those penalties paid. I help taxpayers get relief from penalties as well as make arrangements to pay taxes owed or in some cases negotiate a settlement for less than the amount due. For help getting relief from penalties and for help with your IRS tax issues and state issues use my email below to contact me to arrange an initial consultation. I charge $500 for the consultation but I will apply that initial consultation fee to any of my fees for services if you choose to use me to help you with your tax issues. 

Jeff Haywood, CPA

The CPA Superhero

jeff.jhtaxes@gmail.com

Sources:

IRS Penalty Relief Due to First Time Penalty Abatement or Other Administrative Waiver

IRS First Time Penalty Abatement Policy

Posts:

The Employee Retention Credit: Income Tax Issues

The Employee Retention Credit - Can Your Business Benefit From It?

Execution: The Employee Retention Tax Credit

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.