When tax season comes many people get excited for filing their taxes because they know that this usually means a large refund.
But, this has changed as a result of the tax reform and millions of unfortunate Americans have to send a check to the government on April 15, and in addition to this tax amount, you must add the penalties and interest for not filing and/or paying on time.
Therefore, keep in mind that if you owe money to the IRS it’s important that you pay on time – no later than April 15.
Unfortunately, sometimes paying your taxes can be practically impossible. For this reason, we will discuss in this article the penalties for filing and/or paying your taxes late, as well as some ways to minimize or avoid paying the penalty completely.
How is the penalty calculated?
If you don’t pay your taxes before the April 15 deadline, the fines could begin to accrue from the first day you missed the payment.
The failure-to-pay penalty is 0.5% monthly of the amount of tax you owe, reaching a maximum penalty of 25% of the total unpaid tax.
However, if the IRS issues a notice of intent to levy, then the penalty for non-payment increases from 0.5% to 1% per month.
In addition, if paying penalties wasn’t enough, also add interests to the equation, which are 3 points above the short term federal rate, starting to accumulate from the day after your taxes had to be paid, increasing exponentially until your debt is paid completely.
Compound interest accumulates daily, which means that the interest charged each day is added to the main balance, paying the next day interest on interest, this is not funny at all, right?
Although, paying 0.5% of the debt plus interest may seem costly, the failure-to-pay penalty is less than the failure-to-file penalty.
If you file your taxes late, your pernalty will be 5% of the amount of taxes not paid monthly up to a maximum of 25% of the total amount of taxes owed to the IRS.
If you declare and pay late, you will be fined only with 5% for filing late.
How to reduce the penalty for paying taxes late?
The best way to avoid these penalties is to pay your taxes before the deadline. But, even if you can not pay your full taxes, making a partial payment is better than paying nothing.
You can also avoid the penalty if you show reasonable cause for not paying on time.
Another option that you can take is to settle with the IRS a payment agreement (known as installment agrement), which reduces the penalty from 0.5% to 0.25% per month. Although, this agreement is not free and includes a fee, if you make the payment in the first 120 days you will be exempt from it.
In addition, we recommend that you pay with your credit card, despite what it costs you to do it. The fee for credit card payments starts at 1.87%. It is preferable to owe to your credit card than to the IRS, remember that the rate is 3 points above the federal short term rate.
Pay your taxes on time and forget about the penalties
In conclusion, try to pay your taxes as you go, so tax season becomes exciting again and does not turn into a nightmare with so many hefty penalties.
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We have more than 2000 clients who have given us their trust, and we reward them with a good job, always getting them more in return and leaving our offices with a smile on their faces. Visit us at our renovated offices at 8133 Leesburg Pike, Suite 920 Vienna, Virginia 22182. We can beat taxes together!
You might also want to read: How long should you keep your tax records?