IRS Underpayment Penalties & Interest: Failure to Pay Tax Penalty

irs penaltyNot paying your taxes or underpaying your taxes can lead to a whole slew of problems, but first off you will be charged with penalties and interest that relate to these unpaid taxes. Many times when taxpayers cannot pay their taxes they will file their tax return and then not work with the IRS to solve their unpaid or underpaid tax problem because they are scared as to what will happen. Actually, the IRS prefers to have people work with them if they cannot pay and those people that work out an agreement will typically be charged half of the failure to pay penalty. One exception to this rule is if the tax debt is solely due to the Affordable Care Act.

When the Failure to Pay Penalty is Charged

Each year the payment date for individuals to pay their taxes is April 15th, even if an extension has been filed. A tax extension only extends the tax filing date, not the tax payment date. If you enter into an installment agreement, which allows you to pay taxes back over a period of time, you will still be charged a failure to pay penalty starting the day after taxes are due, but this penalty will only be half of the normal failure to pay penalty.

Failure To Pay Penalty Explained Details

The failure to pay penalty is a monthly penalty between .25% to 1% of the unpaid or outstanding tax amount owed. The normal failure to pay penalty is .5% a month that is calculated starting April 16th. This penalty will continue to add up monthly as long as there is a tax amount that is not paid or some other arrangement has been made to pay back the taxes owed. The maximum that this penalty can reach is 25% of the original tax amount owed. If you enter into an installment agreement the failure to pay penalty will be reduce to .25% a month opposed to the .5% that is normally charged. This penalty can be increased to 1% if the IRS issues an Intent to Levy and the tax balance remains unpaid for 10 days.

If you have also failed to file your taxes, you will be charged with the failure to file penalty as well. When both the failure to file and failure to pay penalties are charged at the same time, it is a maximum of 5% a month that can be charged. This is called the combined penalty. Normally the failure to file penalty is 5% and the failure to pay penalty is .5%, but the IRS reduces the failure to file penalty by .5% when these two are charged together. The maximum the combined penalty can be is 47.5% of the tax amount owed, as long as no tax fraud is involved.

Interest on Unpaid or Underpaid Taxes

The interest that the IRS changes will change every 3 months because it is based off of the federal short-term rate. It is calculated by taking the federal short-term rate and adding another 3% to it. The typical annual interest is between 4% and 10%. The interest that is charged is based off of the total tax amount owed plus prior interest and penalties. The IRS charges interest because they consider not paying taxes the same as borrowing from them, so they require you to pay interest on these outstanding balances.

Removing the Failure to Pay Penalty

The IRS does realize that there are times that taxpayers cannot always stay in full compliance with their taxes and they do allow people that have “reasonable cause” to remove their penalties. About 33% of all tax penalties that are charged by the IRS are later removed. It is possible that this number would be higher if most individuals knew about the penalty abatement provision that is offered by the IRS. In order to receive penalty abatement you must prove to the IRS that you have a legitimate excuse for not paying your taxes on time. The IRS has accepted a wide range of excuses and they handle each on a case by case basis.