No one likes unexpected costs, especially when it comes to taxes. If you owe taxes that aren’t paid on time, you could face penalties and interest that add up quickly. To help you avoid surprises, let’s break down what happens when taxes go unpaid, and what steps you can take to minimize these extra costs.
What Happens If You Don’t Pay Your Taxes on Time?
The IRS expects taxpayers to pay their taxes by the filing deadline. If you don’t, you could face two types of charges: penalties and interest.
Failure-to-Pay Penalty
If you don’t pay the full amount you owe by the deadline, the IRS charges a penalty of .5% of your unpaid taxes per month, up to a maximum of 25% of what you owe.
If you set up a payment plan, the penalty may be reduced to 0.25% per month while your plan is active.
Interest on Unpaid Taxes
In addition to penalties, the IRS charges interest on the unpaid balance. The IRS sets the interest rate quarterly, based on the federal short-term rate plus 3%.
Interest starts accumulating from the original due date and compounds daily, which can cause a significant increase in the amount owed. This continues until the full balance is paid.
What If You Don’t File Your Taxes?
If you don’t file your return at all, you could face an even steeper penalty:
Failure-to-File Penalty: This is 5% of your unpaid taxes per month, up to a maximum of 25%.
If your return is over 60 days late, you’ll owe a minimum penalty of $510 or 100% of your tax balance, whichever is lower.
The best way to avoid this penalty? File your return on time – even if you can’t pay right away.
How to Reduce or Avoid Penalties and Interest
Pay as Much as You Can: Even a partial payment by the deadline can reduce the amount of interest and penalties that build up.
Set Up a Payment Plan: If you know you can’t pay your full tax bill at once, the IRS offers payment plans that allow you to pay over time, significantly reducing your penalties.
Request a Penalty Abatement: If you have a reasonable cause for not paying (such as a serious illness or natural disaster), you may qualify to have penalties reduced or removed.
File for an Extension (But Still Pay What You Can): A tax extension only gives you more time to file – not more time to pay. However, it can help you avoid failure-to-file penalties.
Final Thoughts
No one enjoys dealing with penalties and interest, but understanding how they work can help you make informed decisions and limit extra costs. The best strategy is always to file on time and pay as much as possible to avoid unnecessary fees. If you need help navigating your tax situation, our team is here to guide – we can help you find the best solution for you.