What are the penalties for failing to file or pay taxes on time, and how can I avoid them?

IRS Penalties for Late Filing and Payment

Late Filing Penalty

- The failure-to-file penalty is generally 5% of the tax owed for each month or part of a month that your return is late, up to a maximum of 25%.

- If the return is over 60 days late, the minimum penalty is the lesser of $485 (for tax returns required to be filed in 2024) or 100% of the tax owed.

Late Payment Penalty

- The failure-to-pay penalty is generally 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to 25%.

- The rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy.

- If you have an installment agreement, the penalty decreases to 0.25% for any month the agreement is in effect.

Interest Charges

- Interest accrues on any unpaid tax from the due date of the return until the date of payment in full.

- The interest rate is the federal short-term rate plus 3%, compounded daily.

Strategies to Prevent Incurring Penalties

File and Pay on Time

- File your return and pay any owed taxes by the due date to avoid interest and penalty charges.

Pay As You Go

- Adjust withholding on paychecks or the amount of estimated tax payments to prevent underpayment penalties.

Use Electronic Payment Options

- Electronic payments are convenient and ensure timely receipt by the IRS.

Request an Extension

- If you need more time to file, request an extension using Form 4868. Remember, this is not an extension of time to pay.

Set Up a Payment Plan

- If you can't pay in full, apply for a payment plan or installment agreement.

Reasonable Cause for Penalty Abatement

- The IRS may abate penalties if you can show reasonable cause for the failure to file or pay on time.

Check for Eligibility for Relief Programs

- Stay informed about any relief programs that may offer penalty relief, such as those for businesses affected by COVID-19.

By following these strategies, taxpayers can minimize or avoid penalties and interest charges associated with late filing and payment of taxes.

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Sources:

Topic no. 653, IRS notices and bills, penalties, and interest charges 2024-08-02

Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated ... 2024-08-03

Failure to Deposit Penalty | Internal Revenue Service 2024-08-01

Tax Time Guide: Escape penalties and interest with electronic payment ... 2024-08-02

Publication 334 (2023), Tax Guide for Small Business 2024-07-31

Publication 17 (2023), Your Federal Income Tax | Internal Revenue Service 2024-07-29

Name Image Likeness - Taxpayer Advocate Service 2024-08-01

COVID-19 Business Tax Relief - Taxpayer Advocate Service 2024-08-01

Taxpayers should file their tax return on time to avoid costly interest ... 2024-08-04

Publication 557 (01/2024), Tax-Exempt Status for Your Organization ... 2024-08-03