As the October 2021 tax deadline approaches, it is essential that you be prepared, but what is the penalty for paying taxes late?
The IRS extended the deadline for filing 2020 tax returns to October 15, 2021, rather than the usual national Tax Day of April 15. Taxpayers who have not yet filed can still do so, even electronically. There are a few exceptions to the rule, namely:
- American taxpayers currently serving as members of the military and are in a combat zone have up to 180 days after they leave the combat zone to file and pay their due taxes before penalties and interest accrue.
- Taxpayers who are currently in a declared disaster area with valid extensions are also currently exempt from the October 15 deadline.
All other taxpayers who have not yet filed their tax returns for 2020 may be facing penalties if they miss the October 15 deadline.
What Is the Penalty for Paying Taxes Late After October 15th?
There are two aspects to the penalty for paying taxes late: the failure to file penalty and the failure to pay penalty.
The penalties or filing and paying taxes late are some of the steepest the IRS can levy at you. Your failure to file penalty is 5 percent of unpaid taxes, and an additional 5 percent for every month the tax return remains due, for a maximum of 25 percent of unpaid taxes.
Your failure to pay penalty is 0.5 percent of unpaid taxes, and an additional 0.5 percent for every month the tax return remains due, for a maximum of 25 percent of unpaid taxes.
When both penalties are applied together, they are initially combined into a 5 percent monthly penalty (4.5 percent failure to file penalty and a 0.5 percent failure to pay penalty). However, both add up to a maximum of 25 percent each, first after five months (due to failure to file), and then after another 45 months (due to failure to pay).
Applying for a payment plan can reduce your penalties. Failing to file for ten days or less results in a partial month or 1 percent penalty. Note that you can provide a reasonable cause for paying and filing late, and if the IRS deems it reasonable enough, you can avoid a penalty for paying taxes late.
Get a Professional Tax Filer
If you haven’t gotten around to filing your taxes yet, then getting in contact with a tax professional is crucial. You only have a few days until the October deadline, and every moment counts. Know what it takes to qualify as a professional tax preparer and choose your tax professional accordingly.
Scheduling a Payment Plan Today
If you have received a penalty for paying taxes late, it’s important to schedule a payment plan today. For example, if you currently owe the IRS taxes or have haven’t made your federal tax payments, you can do so online either via:
- IRS Direct Pay, which lets you pay from a checking or savings account for free.
- A credit card or debit card via the IRS’s payment processor (charges a fee).
- The Electronic Federal Tax Payment System.
- The IRS2Go app, which allows you to pay via your phone using a credit card, debit card, or Direct pay.
- Through a tax preparer or online tax preparation software.
- Other electronic payment options.
What Do You Owe the IRS?
If you aren’t sure what your standing is with the federal government, you can find out by reviewing your tax account via the Internet. Head to the IRS’ login portal and use your credentials to get an overview of the information you might need when preparing your own tax return to file before the October deadline, including:
- Your AGI. This is your adjusted gross income, an important number for calculating your income tax.
- Your EIP amounts. These are the economic impact payments the government has sent you. If you did not receive the full amounts of both economic impact payments (i.e. stimulus checks), you can claim the Recovery Rebate Credit on your 2020 return. This is a tax credit, meaning it reduces the amount of tax you owe the government.
- Your estimated tax amounts. These are a total of the estimated tax payments you have already made to the government as a self-employed individual, as well as any refunds applied.
- Your current tax balance. This is how you find out whether or not you currently owe the IRS any money.
- Any outstanding notices. If you have been sent physical notices via mail, you can review them digitally through your online tax account.
- Payment history and upcoming or pending payments. If you are currently in a payment plan with the IRS to pay off your tax debt, you can also review when your next payment is due, regardless of whether your plan is manual or automatic.
- And more.
What Happens if You Don’t Pay?
The IRS can pursue your tax account in multiple different ways if you fail to file and/or pay your taxes. Any penalties and interest accrue alongside any tax debt the IRS calculates from missing estimated taxes and unpaid or unmentioned taxes, after tax credits.
If the IRS discovers that you still owe taxes after using up your credit, they will send you a notice alongside a date for your tax estimation, which officially dates your tax debt. At this point, your debt will begin to accrue interest and additional penalties, until maximum penalties are reached (your debt may continue to grow via interest or additional missed payments).
What Happens Next?
As your debt to the IRS grows, so does the pressure they can apply to you. One of the first steps the government takes to ensure its claim is a tax lien, which prioritizes the government’s interest in your assets, properties, and accounts above that of other creditors. While this is not a forcible claim of anything you own, it does limit your ability to seek financing or pay off other loans and debts until you deal with your taxes.
If the debt continues to go unpaid, the IRS can resort to tax levies, physically claiming individual properties or assets, cleaning out accounts, or taking a portion of your wages and compensations in the form of wage garnishment, until your debt is forcibly paid.
The penalty for paying taxes late can be severe. However, liens, levies, and other collection actions can be delayed, avoided, and resolved through a payment plan with the IRS, and other options. You can file as currently not collectible to delay collection actions if you are financially struggling or work on an offer in compromise to reduce your total tax debt. Always discuss your situation with a tax professional before making any rash decisions, especially if you are currently in tax debt.