Truth about Tax Time Deadlines, Penalties, and Payment Options
Understanding tax deadlines, penalties, and payment options can help you to get ahead on your tax liability. This year, the deadline to file and pay to avoid a penalty is May 17th. If you are owed a refund, you have up to three years to file and still receive a refund of taxes owed.
Even if you cannot pay by the deadline, you should file to avoid a penalty. If you cannot pay it all, pay what you can and set up a payment plan. Below are more detailed information and resources.
The failure-to-file penalty is when you don’t file by the tax deadline and owe taxes. If you do not owe or are expecting a refund, there is no penalty for failure-to-file. The penalty is equal to 5 percent of the tax owed for each month or part of a month that your return is late up to a maximum of 25%. If your return is over 60 days late, there is a minimum penalty added which is the lesser of $435 or 100 percent of the tax owed.
For example, Bernard and Cheryl file their 2020 tax return on June 17th, 2021 and owe $700. Their failure-to-file penalty is calculated as follows: $700 X 5% X 1 = $35
The $700 tax liability is multiplied by 5% and 1 month to calculate their failure-to-file penalty of $35 on June 17th which will be billed along with the rest of the remaining tax, penalties, and interest. They could have avoided a penalty for failure-to-file by filing before the May 17 deadline.
If you cannot file by the deadline, you can file for an extension. For information regarding extensions please visit “Extension of Time to File your Tax Return”.
The failure-to-pay penalty is when you fail to pay all the tax you owe by the year’s tax deadline. It is equal to one half of one percent of the tax owed for each month or part of a month that your return is late up to a maximum of 25% until the amount is paid in full. Along with the penalty, there is also interest which accrues beginning on the due date of the return until the balance is paid in full. Interest rates vary quarter-to-quarter and is the federal short-term rate plus 3 percent. Interest is compounded daily. When you receive a bill for a payment, it will include amounts for remaining tax, penalties, and interest. Payments made to the IRS will be applied first to the remaining tax, then to penalties, then to interest.
There are several payment options available through the IRS website at “Paying your Taxes“. You can pay via direct withdrawal from a bank account, debit card, or credit card. Check or money order are also acceptable payment methods. Cash payments can be made using an IRS participating Retail Partner or through a nearby IRS office location.
Online payment plans can be used to pay off the amount over an extended period of time. Payment options include both short-term (120 days or less) and long-term (installment agreement) plans. Short-term plans do not have a setup fee, but the accrued interest and penalties will remain until the balance is paid in full. Long-term plans have a $31 setup fee plus accrued interest and penalties until the balance is paid in full. Taxpayers can revise their payment plans to pay off the balance earlier or later.
If you cannot pay your tax liability right away, don’t panic. It is best to file, pay what you can, and set up a payment plan before the tax filing deadline. For more information regarding IRS bills, penalties, and interest please visit IRS Tax Topic No. 653.