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Why You Might Have to Pay a Tax Penalty

The deadline to file and pay taxes has come and gone. Every year, many Americans miss the tax deadline and don’t seek extensions, according to the IRS. If you’re in that group and owe taxes, the IRS can charge you penalties and interest on the amount you owe. If the IRS owes you a refund, however, there's no penalty for filing late. But you must file within three years of this year's tax deadline or you'll forfeit your refund to the U.S. Treasury. Here’s what you need to know, depending on your circumstances.

If you didn’t file your return by the IRS tax deadline, the IRS will charge you a “failure to file” penalty that grows every month that you don’t file your return. The tax penalty is typically 5 percent of the amount you owe. After one month, if you still haven’t filed, it rises by another 5 percent—to 10 percent—of the original amount owed. This could continue until your total tax penalty rises to 25 percent. If after 60 days, you still haven’t filed, an IRS rule may kick in that charges you a minimum penalty of $205 or 100 percent of what you owe, whichever is less. This may not apply, however, depending on how much you owe the IRS. The IRS let's you know whether you will be charged the 60-day penalty or if you’ll continue to be subject to the 5 percent growing penalty.

If you filed your return on time, but haven’t yet paid, you’re in a better position. You’ll have to pay a tax penalty of one half of one percent for every month that you’re late—much lower than the penalty for filing late. Like the “failure to file” penalty, the late payment penalty grows every month. So if you pay one half of one percent in the first month you’re late, the total penalty will rise to 1 percent in the second month and 1.5 percent in the third month. This will continue until the tax penalty reaches a cap of 25 percent of the amount you owe, which can take more than four years.

Unfortunately, you’re also liable for interest on what you owe. That interest is based on the federal short-term rate and changes every quarter. Currently it's annualized to 4 percent and is compounded daily.

Figuring out how much you’ll owe in penalties is complicated. Barbara Weltman, contributing editor of J.K. Lasser's Your Income Tax 2016 (Wiley, 2015) suggests using a calculator that can help you to estimate what your penalties will be.

Mitigating Factors

One way to lower your tax penalty is to sign up for the IRS installment plan. You can do this if you filed on time but haven’t yet paid the taxes owed. Under the installment plan, your late-payment penalty is cut in half, to one-quarter percent. You’ll still owe interest on the unpaid balance.

There some instances when the IRS will excuse you if you were late to file or pay:

  • If you are active-duty military working abroad or the victim of a federally declared disaster, you can submit a detailed explanation and backup documentation to the IRS explaining your situation. The IRS will review and let you know if you are exempt from paying penalties.

  • If you or someone in your family was seriously ill and couldn’t meet the tax deadline, the IRS may consider that reasonable cause for being late. If you get a penalty notice, respond explaining your situation.

  • If you were affected by a disaster that was not federally declared and were unable to file or pay your taxes, the IRS may still waive penalties and give you an extension. If you live in Houston, where there were severe storms and flooding during that tax-filing period this year, contact the IRS to request penalty abatement. The IRS has also extended the tax deadlines in parts of some states affected by severe storms. In areas of Arkansas, Mississippi, and Missouri, the IRS the tax deadline is now May 16. In sections of Louisiana, and other parts of Texas and Mississippi, taxpayers have until July 15 to file and pay.

  • U.S. citizens and resident aliens who both live and work abroad have until June 15 to file a completed return. You will, however, have to pay interest on the amount due for the period between April 18 and June 15.

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