Most people hope to receive a tax refund, or have a zero tax bill when they prepare their taxes. However, there are millions of families and individuals, that end up owing additional taxes (tax due). In this situation, what do you do, if you cannot afford to pay the amount that you owe? Do you not file, and put it off for another time when you have the money? Do you hope the IRS will not notice that you did not file? Or do you pay what you can and make a payment arrangement for the remaining balance?
Whether or not you can afford to pay the tax amount that you owe, it is strongly recommended that you file by the tax deadline which is April 15th. Not filing by this date will result in additional interest and penalties, which will further increase the amount that you owe. If you realize that you cannot pay the amount that you owe, make a payment arrangement with the IRS, so that you can pay in small amounts until you have paid off your tax bill. Please note that while you make a payment arrangement, you will still be hit with interest, however, you will avoid the penalty for a failure to file your return.
According to IRS.gov, “the failure-to-file penalty is generally more than the failure-to-pay penalty.” The IRS assesses the penalties and interest monthly, and they begin to accrue the day after taxes are due, which is April 16th. The longer you take to file or pay from this April 16th date, the more you will owe.
The penalty for not filing by April 15th is 5% of your unpaid tax balance, which is accrued each month. The maximum amount of penalty that you will be hit with for failing to file is 25% of your unpaid taxes. For example, if you owed $1,000 in taxes and did not file, at the end of one month (by May 16th), you would have owed $1,050, as you were assessed $50 in penalty after one month. After two months, if you did not file, you would have owed $1,102.50, as you were assessed an additional $52.50 in penalty after the second month. For each additional month, keep calculating 5% of your new balance ($1,000 owed + all penalties incurred to date). The maximum you would owe however, is $1,250, as the maximum penalty that you can have is 25% of your original unpaid taxes.
The penalty for not paying all of the amount that you owe by April 15th is 0.5% of your unpaid balance which is accrued each month. Let’s use the same $1,000 mentioned above. In this situation, you did file by April 15th, however, you were not able to pay anything towards the $1,000 that you owe. At the end of one month (by May 16th), you would have owed $1,005, as you were assessed $5 in interest after one month. After two months, if you still did not make any payment, you would have owed $1,010.03, as you were assessed an additional $5.03 in interest after the second month.
While the penalty for failure to file is capped at 25% of your unpaid tax balance, if you do not pay off your tax balance at any point, you will continue to accrue 0.5% each month until all taxes due and interest are paid off. Also, if any month you owe penalties for BOTH failure to file, and failure to pay, you will only be assessed a 5% penalty that month for both.
If you need more information on IRS Payment Plans, please check this link out: Additional Information on Payment Plans.
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