Penalties for Not Filing and Paying Taxes

If you don’t file your taxes, the IRS may penalize you, and those penalties can be pretty severe. In this guide, we’ll look at some of the things you need to know about IRS penalties, from late filing fees and the amounts charged to the exceptions that could help you avoid serious financial consequences.

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Types of IRS Penalty

If you file your taxes on time, in full, and without delay, you don’t have to worry about penalties and will probably never encounter any issues or resistance from the IRS. if you slip up, you may be charged the following:

Late Filing Penalty

You need to file your taxes by April 15 every year (the following business day when Tax Day falls on a holiday or weekend). If you miss this tax due date, the IRS may charge a failure to file penalty. 

This penalty is charged as 5% of the amount owed for every month that the tax filing is late. It also applies to part of a month, and this continues for 5 months after the initial due date. 

There is a minimum late filing penalty charged for submissions that occur more than 60 days after the deadline.

Late Payment Penalty

If you file your tax return on time but don’t pay, you’ll be hit with a penalty of 0.5% of your unpaid taxes every month. This sum will grow every month that you don’t pay and will only end when it reaches 25% of the total tax payment or when the full amount is paid.

Bad Payment Penalty

If you pay before the tax deadline but the check bounces or the payment is declined, you will be charged a bad payment penalty. For amounts of less than $1,250, your penalty will be the lesser of $25 or the full amount of the payment. If it’s more, it will be 2% of the total.

You Can Request a Waiver

You can ask the IRS to waive the penalty if you have never filed a tax return before. No one’s perfect, tax is complicated, and people make mistakes. However, for this to happen, you need to have filed by the filing deadline and paid any back taxes owed.

You can also request reasonable cause for not being able to pay or file on time. Acceptable situations include:

  • Serious and unexpected disasters such as fire or casualties
  • Inability to get tax records
  • A serious illness (or death) to the taxpayer or immediate members of their family

Where possible, you will be asked to provide proof, such as hospital records. You can also merely ask for an extension, stating your reason and potentially adding a few months to the filing deadline.

This does not absolve you from paying taxes but may help you avoid penalties for unfiled taxes.

Tax Evasion

If you continue to avoid filing taxes then the IRS may file something known as a Substitute for Return, where they essentially file them for you. There are plenty of warnings before this happens, but if it does happen and you don’t pay the amount owed, you could face more fines and may eventually receive jail time.

After all, at this point they pretty much rule out an honest mistake and reasonable cause; it stops being about a late payment and becomes tax evasion.

Installment Agreements and Interest Rates

If you can’t pay your taxes on time the IRS may offer you an installment agreement, which will allow you to spread your tax debt out, creating manageable monthly payments. On the surface, it seems like a sensible option, an easy escape, but if you accept such an offer you will pay interest and penalties.

The interest rate changes, but can be around 5%, and while the penalty rates are less than what you would pay by refusing to file, they will still increase the size of the debt. 

A payment plan can help you when a tax bill is threatening and a deadline is looming, but if you have the money, it’s always best to pay in full.

Tax Refunds

If you’re expecting a tax refund, you likely won’t be hit with failure to pay penalties. The IRS is focused on individuals who owe large sums of money and are avoiding payment. 

But that doesn’t mean that you can afford to be lax with your filing. Taxes should take priority every year, because the consequences of not filing on time and not paying in full are much worse than spending a few minutes stressing over seemingly endless forms.

United States federal tax law is not forgiving and should not be tested. 

How to Avoid Federal Income Tax Issues

A tax professional can help you if you have any issues, need any help or are struggling to file your taxes correctly and on time. They will charge you for their service, but if you’re worried about tax penalties, they could save you a great deal of time, stress, and money.

An accountant is essential if you make a lot of money and have a lot of deductions, as is the case for most self-employed individuals. It is also essential for businesses, because while it can be a costly expense, the money they save you will likely offset the fees they charge.

If you don’t make a lot of money and genuinely can’t afford the expense, you can use tax software. Programs like TurboTax were designed to help everyday Americans file their taxes correctly and on time, and use simple, clean interfaces and features to simplify the process. They are not as thorough and still require a lot of input from you, but they’re also much cheaper than hiring a professional to file taxes for you.

If you have missed your payment deadline, accumulated a lot of tax debt and are in over your head, there’s little that an accountant or accounting software can do. In such instances, you need a tax lawyer to help you. They will charge even more, but again, the services they provide, which can include negotiating an offer in compromise, are essential.