Nobody likes paying taxes. But try not paying or paying late and see how you like it. The penalties and interest you get hit with make Don Corleone look like Snow White.
First let’s look at what happens if you file but don’t pay.
In this case, you’ll start racking up .5% per month penalty on what you owe. But that’s just during your honeymoon period. You will get a few reminder notices and then the IRS will send you a final notice. At that point the fine goes up to 1% per month. And that’s just the penalty.
On top of that you’ll start ringing up interest on the tax you owe starting from the day after your tax payment was due – April 16th in most cases. The rate is the federal short-term rate plus 3 percent and it compounds daily.
It Gets Uglier
If you don’t file and don’t pay, the IRS takes off the gloves and smacks you up side of the head big time. You’ll pay 4.5% per month on top of the penalties and interest charges I mentioned above. And while the failure to file penalty stops accruing after you hit a total of 25%, the failure to pay penalty (.5% per month) continues to click away. Bottom line, if you don’t file and don’t pay, you could easily be looking at a total penalty of 47.5%. Aye Carumba!
Extensions Might Help
In some circumstances, you can create a little breathing room for yourself by getting a tax filing extension. This isn’t a hard process. But you still need to pay at least 90% of what you owe by the normal due date. If not, you’ll be looking at penalties and interest charges (although only .25% a month) but at least you’ll escape the hefty “failure to file” penalty.
If you have special circumstances, the IRS might give you extra leeway. For example, if you are on active military duty and stationed in a combat zone you’ll get an extra 180 days to file no questions asked. Or if you can prove you are living or working overseas, the IRS will let you file by June 15th without much problem either.
If you have other unique situations, you can try to get some wiggle room but don’t hold your breath. The IRS has heard it all before and they don’t easily grant penalty free extensions.
How to Avoid This Problem Completely
You can avoid this problem but first you have to drill down to find the root cause. Did your current CPA drop the ball? If so, find a new one fast. Do you prepare your own taxes and did you procrastinate too long? If so, file for the extension and calendar it next year to start earlier. Are you ready to file but don’t have the money to pay the bill? File anyway and contact the IRS for a payment plan.
Another option is to pay your bill using a credit card – but I’m no fan of this. First, the IRS only works with a handful of credit card companies. Second, you’ll have to pay a hefty setup fee even if your credit card company works with the Treasury. And most important, the interest you’ll pay to the credit card company is probably a lot higher than the .5% the IRS charges.
The interest charges for filing late are significant but the penalties for not filing are what you really have to avoid. In a perfect world, you’ll get your taxes filed and paid on time. If you need more time, file an extension. If you can’t pay your tax bill, call the IRS and set up a payment plan. But whatever you do, don’t ignore this. Taxes are a problem that don’t go away unless you take care of them Pilgrim.
Leave a Reply