It’s after April 15th, the end of tax season. If you missed the tax filing deadline, it’s not the end of the world. You can file a late tax return any time after tax day. If you are current with your tax payments, you may avoid late filing penalties.
What You Should Know About Tax Penalties
The Internal Revenue Service (IRS) may impose two types of penalties if you don’t file by the tax return deadline.
Failure to file penalty
This is a penalty for not filing your federal income tax return. The failure to file penalty is calculated at 5% of the tax bill due for each month or part of a month that the federal tax return remains unfiled.
For tax returns more than 60 days late, the minimum failure to file penalty is:
- $435, or
- 100% of the amount shown on the tax return, whichever is less.
The amount of the failure to file penalty is capped at 25% of the balance due.
Failure to pay penalty
This is a penalty that accrues on any tax due. The failure to pay penalty is .5% (1/2 of 1 percent) of the amount due for each month or part of a month that the tax return remains unfiled after the filing date. There usually is no minimum penalty for failure to pay.
Like the failure to file penalty, the maximum penalty is 25% of the outstanding balance. The maximum combined penalty for failure to file and failure to pay is 5% per month, up to a combined total of 25%.
Good news: These penalties only apply when there are unpaid taxes on your federal return from the previous tax year. That is, when you owe the IRS money. In other words, if the federal government owes you money, it’s in your best interest to file that late return as soon as possible.
Here are a couple of other notes:
- Interest charges accumulate on outstanding balances and penalties. The IRS determines the interest rate for individual taxpayers quarterly. It is based upon the federal short-term rate plus three percentage points.
- The IRS may grant penalty relief if you can show reasonable cause. Interest charged on penalties will be reduced or removed when the penalty is reduced or removed.
- If you cannot pay all at once, the IRS provides payment options. If you qualify, you can set up a payment plan, such as an installment agreement.
- For members of the Armed Forces deployed to a combat zone, the IRS grants an automatic extension for up to 180 days after the last day spent in a combat zone.
- For U.S. citizens living overseas, the IRS has a program known as Streamlined Filing Compliance Procedure (also known as streamlined procedure), which might help abate possible penalties.
In any case where the IRS charges penalties, you will receive a letter from the IRS. The instructions in the letter are usually straightforward. You don’t have to wait until you receive the letter to take action. In fact, there might be good reason to move forward before you receive the letter.
What to Do If You Missed the Due Date
If last year’s tax situation required extra time, that’s okay. It’s a good idea to file your tax return as soon as possible. If your tax situation is straightforward, you can use the IRS Free File program. That will stop the clock on the late filing penalty and keep your total tax bill. as low as possible.
If possible, you should also pay the full amount of federal taxes due. Taxpayers might find it easiest to go to the IRS website to use their Direct Pay feature. From here, you can set up your payment to come directly from your bank account or to be charged to your debit or credit card.
If you cannot pay the entire amount at once, you should still file your tax return. This is the fastest way to stop the bleeding. You’ll still accumulate a late payment penalty, but the late-filing penalty stops accumulating.
If you can pay within a relatively short period of time (less than 1 month), then you might not need to set up a payment plan. But if it will take you longer than a month, you might be better off setting up a payment agreement.
What to Do If You Have to Set Up an Installment Plan?
The IRS provides two types of installment plans, short term and long term.
Short term plans are designed to be paid in 180 days or less. There are zero set up fees, and you can pay by:
- Checking account
- Credit or debit card
- Money order
Long term plans, known as installment agreements, are for large balances. These might require more than 180 days to pay off. There are two ways to set up an installment agreement:
- Monthly automatic withdrawals. The set-up fees for monthly withdrawals are lower if you set up automatic payments. You can do this from a checking account at your financial institution. For large balances (more than $25,000), the IRS will require this.
- Pay each month. The set up fee is higher ($131 instead of $43), but you are able to have some control over your monthly payments.
For installment agreements, certain low-income households can have the set-up fees waived. Unless waived, you will pay the accrued penalties and interest as part of your payment plan. However, you will avoid additional penalties or late fees. Of course, the best course is to avoid penalties in the first place.
How do you avoid penalties in the first place? Proper tax planning, of course. Tax planning done throughout the year is the best way to ensure that your tax return is filed on time. By working with a tax advisor you will know:
- What your tax bill should be
- Whether you need to pay more throughout the year
- What tax documents you might need to file your tax return.
Most importantly, if you’re late in getting your tax documents together, your tax professional can file a tax extension. That’s one of the first things an accountant will do when people get behind during tax season. An extension of time can buy you a couple of extra months so you can get things in order.
You’ll want to make sure that you’ve paid your expected tax bill by the filing deadline. That way, you’ll avoid the failure to pay penalty.
After retiring from a 24-year career as a Naval officer in 2017, Forrest became a financial planner to help people achieve success in managing their personal finances. In 2022, he sold his partnership stake in his financial planning firm to focus on helping people full-time through his writing.
Featured in: Forrest’s writing has been featured in the following publications: Forbes, Military.com, NerdWallet, Yahoo Finance, The Military Guide, The Military Wallet, Christian Science Monitor, and many other publications.
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