Interest and Penalties for Filing or Paying Taxes Late

Of course there are numerous taxes you could be late on, including state taxes, local taxes, sales taxes for your business, etc.  But for the purposes of this article, we’ll be looking only at federal income taxes.

The first thing to note is you are penalized for failing to file on time, and you are penalized for failing to pay on time, and these are two different things.

You owe a penalty of 5% of the tax owed for every month or partial month you are late filing, up to five months, with the further proviso that if it’s at least two full months late, the late filing penalty must be at least $135 (unless the entire tax owed is less than $135, in which case that’s the amount of the penalty).

Separately and additionally, you owe a penalty of 0.5% (half a percent) of the tax owed for every month or partial month you are late paying, with a cap of 25%.  Ten days after the IRS issues a notice of intent to levy, the penalty increases to 1%; for any months that an installment agreement is in place, it decreases to 0.25% (quarter of a percent).

As you can see, it’s strongly in your interest to file on time even if you don’t pay in full.  Let’s say you owe $500, and you won’t be able to pay it until some time in July, three months after your taxes are due.  If you file then and pay then, you’ll have a penalty of 15% for filing late and 1.5% for paying late.  Whereas if you file on time but don’t pay until July, you’ll have the 1.5% penalty for paying late but no penalty for filing late.

Now on top of these penalties for filing and/or paying late, you also have interest to contend with.  The IRS charges 4% annual interest on the money you owe them.  (This rate is variable and can change per quarter.  As of the first quarter of 2010, it’s been 4% for the last year.)

It’s worth noting you may be able to reduce or eliminate your penalties if you file a request for an extension.  For the details on this (and all other matters covered in this article of course), you’ll want to check with the IRS or a qualified tax professional.

Also, just to close with a little good news, if you file late and it turns out you don’t owe any taxes, there is no penalty.  You’ll still get your full refund.  (5% of zero per month is zero after all, as is 0.5% of zero.)