As a taxpayer, it is important to understand the penalties that the Internal Revenue Service (IRS) may impose if you fail to file your taxes or pay your taxes on time. These penalties can add up quickly and make it even more difficult to pay off your tax debt. In this article, we will take a closer look at the failure to file and failure to pay penalties and what you can do to avoid them.
Failure to File Penalty
The failure to file penalty is imposed when you do not file your tax return by the due date or extended due date, including any applicable grace period. The penalty is assessed at a rate of 5% per month of the unpaid tax amount, up to a maximum of 25% of the unpaid tax.
For example, if you owe $5,000 in taxes and do not file your tax return until 5 months after the due date, you would be subject to a penalty of $1,250 (5% of $5,000 per month for 5 months).
The failure to file penalty is generally more severe than the failure to pay penalty, as the penalty continues to accrue even if you have paid some or all of your tax liability. In addition, the penalty can be assessed for each month or part of a month that your tax return is late, up to a maximum of 5 months.
To avoid the failure to file penalty, it is important to file your tax return on time, even if you are unable to pay your tax liability in full. You can also request an extension of time to file your tax return, but you must still pay at least 90% of your tax liability by the original due date to avoid the failure to pay penalty.
Failure to Pay Penalty
The failure to pay penalty is imposed when you do not pay your taxes in full by the due date, including any applicable extensions. The penalty is assessed at a rate of 0.5% per month of the unpaid tax amount, up to a maximum of 25% of the unpaid tax.
For example, if you owe $5,000 in taxes and do not pay your taxes in full until 5 months after the due date, you would be subject to a penalty of $125 (0.5% of $5,000 per month for 5 months).
The failure to pay penalty is generally less severe than the failure to file penalty, but it can still add up quickly. The penalty is also assessed for each month or part of a month that your tax remains unpaid, up to a maximum of 25% of the unpaid tax.
To avoid the failure to pay penalty, it is important to pay your tax liability in full by the due date, or at least make a partial payment to reduce the amount of the penalty. You can also set up a payment plan with the IRS to make monthly payments until your tax liability is paid in full.
Conclusion
The failure to file and failure to pay penalties can be costly and make it even more difficult to pay off your tax debt. To avoid these penalties, it is important to file your tax return on time and pay your tax liability in full by the due date. If you are unable to pay your tax liability in full, you can set up a payment plan with the IRS or request an extension of time to file your tax return. Remember, the penalties for not filing or paying your taxes can add up quickly, so it is important to take action as soon as possible.