Failure to file or failure to pay; is there a lesser of two evils?
There are two IRS tax penalties that you put yourself in jeopardy of paying when you don’t file your tax return on time.
- Failure-to-File Tax Penalty. This applies to you if you did not file your tax return by the tax filing deadline and owed tax to the IRS.
- Failure-to-Pay Tax Penalty. This applies to you if you filed your tax return but did not pay your entire tax liability due by the tax filing deadline.
If you are expecting a refund, you will never be held liable for a penalty fee.
How do I calculate my failure-to-file tax penalty?
The late filing penalty is 5% of the additional taxes owed amount for every month or fraction of a month that your return is late. This is capped at 25%. Let’s take a look at an example.
Let’s say you owe the IRS $950. One September morning, you wake up and it hits you. You forgot to file your 2015 tax return! You can assume that you will owe the IRS an additional $240. Here’s the math:
$950 tax liability x 5% = $47.50 per month late
$47.50 x 5 months past the deadline = $237.50 total
How do I calculate my failure-to-pay tax penalty?
The late payment penalty is 0.5% (or half a percent) of the additional tax liability amount owed for every month or fraction of a month that you do not pay the IRS. This is capped at 25%. Let’s take a look at the math using the previous example.
$950 tax liability x 0.5% = $4.75 per month unpaid
$4.75 x 5 months past the deadline = $23.75 total
Since there is a 25% cap on this amount, your penalty fee has the potential to accrue for over four years.
What if I am responsible for both IRS penalty fees?
If both penalties apply to you for any month(s), then the IRS will waive the 0.5% failure-to-pay penalty fee. You will only be liable for the failure-to-file penalty in addition to your original tax liability.
What if I can’t pay my tax liability?
Some taxpayers think that the easiest way around this question is to not file their tax return at all and just deal with the repercussions later. This is not the way to go about it. In fact, the failure-to-file penalty can add up to ten times the amount of the failure-to-pay penalty.
If worse comes to worst, file now. Pay later.
The IRS will work with you.
If you are unable to file or pay your taxes and can show reasonable cause for not doing so, then the IRS might not hold you responsible for these penalty fees. There are also payment plans that you can set up with the IRS, so that you aren’t shelling out what you can’t afford all at once. As long as you show initiative, the IRS will appreciate that and try to help you out.
Get started today or file an extension.
I think it’s safe to say that there really is a lesser of two evils when it comes to the IRS penalty fees. You’re reading this article, so taxes are already on your mind. If you have your income statements handy, then you can create an account now with RapidTax. This is the first step to avoid both of these penalty fees altogether. Planning on filing after the deadline? File a tax extension with us for free beginning on March 17th.
Photo via Alexandre Normand on flickr.