If you owe taxes to the IRS and fail to pay them by the due date, you may be subject to a ‘failure to pay’ penalty. This penalty is assessed on unpaid taxes and can add up quickly, making it even more challenging to pay off your tax debt. In this post, we will discuss what you need to know about the IRS ‘failure to pay’ penalty and how to avoid it.
What Is the Failure to Pay Penalty?
When you have unpaid taxes by the deadline, the IRS will impose a ‘failure to pay’ penalty. Up until the taxes are fully paid, the penalty is computed as a percentage of the outstanding taxes and is imposed each month. Up to a maximum of 25%, the penalty rate is 0.5% for each month or a fraction of a month that the tax is unpaid.
When Is the Failure to Pay Penalty Assessed?
When you don’t make payment for your taxes by the deadline, which for individual taxpayers is typically April 15th, you will incur a ‘failure to pay’ penalty. However, if you file for an extension, the due date is extended to October 15th. If you do not pay your taxes by the due date, the penalty will be assessed on the unpaid balance starting on the day after the due date.
How Is the Failure to Pay Penalty Calculated?
The inability to pay the penalty is estimated according to the overall amount of outstanding taxes and the number of months they remain unpaid. Up to a maximum of 25%, the penalty rate is 0.5% for each month or a fraction of a month that the tax is unpaid. For instance, the fine is $200 ($10,000 x 0.5% x 4 months) if you owe $10,000 in taxes and don’t pay them for four months.
Can the Failure to Pay Penalty Be Waived?
In some cases, the ‘failure to pay’ penalty can be waived if you can demonstrate reasonable cause for the late payment. Examples of reasonable cause may include a serious illness, a natural disaster, or a mistake made by a tax professional. However, the burden of proof is on the taxpayer to demonstrate reasonable cause, and the IRS will review each case on an individual basis.
How to Avoid the Failure to Pay Penalty?
The best way to avoid the ‘failure to pay’ penalty is to pay your taxes on time. If you are unable to pay your taxes in full by the due date, you should consider filing for an extension or setting up a payment plan with the IRS. By doing so, you may be able to avoid or reduce the penalty. Additionally, you should always file your tax return on time, even if you cannot pay the full amount owed. Failing to file a tax return can result in even more significant penalties.
What Are the Consequences of Failing to Pay Taxes?
Failing to pay your taxes can have serious consequences, including additional penalties and interest, liens on your property, and even wage garnishment or seizure of assets. Therefore, it is essential to make every effort to pay your taxes on time and in full. If you are unable to pay your taxes, you should contact the IRS to discuss your options.
How to Set Up a Payment Plan with the IRS?
In case you are unable to pay your taxes in full, you may be able to set up a payment plan with the IRS. To do so, you will need to file Form 9465, Installment Agreement Request, and provide information about your income, expenses, and assets. You can choose to make monthly payments or make a partial payment upfront. Keep in mind that setting up a payment plan will not eliminate the ‘failure to pay’ penalty, but it may reduce it.
What Are the Benefits of Setting Up a Payment Plan with the IRS?
Setting up a payment plan with the IRS can have several benefits, including:
- Avoiding Additional Penalties: By setting up a payment plan, you can avoid additional penalties for failing to pay your taxes on time.
- Protecting Your Credit Score: Failing to pay your taxes can negatively impact your credit score, but setting up a payment plan can help protect it.
- Reducing Stress: Trying to come up with a lump sum payment for your tax bill can be stressful. A payment plan allows you to spread out your payments over time, making them more manageable.
Can Interest Be Waived on the Failure to Pay Penalty?
No, interest cannot be waived on the ‘failure to pay’ penalty. The penalty and interest are separate charges, and both will continue to accrue until the tax debt is paid in full. The interest rate is currently set at 3% per year and is compounded daily.
What Happens If You Ignore the Failure to Pay Penalty?
The penalties and interest will continue to accrue if you disregard the ‘failure to pay’ penalty and fail to make your tax payments. The IRS may take additional legal action to recover the debt. This can include placing a lien on your property, seizing your bank accounts or other assets, and garnishing your wages. It is essential to address any tax debt as soon as possible to avoid these consequences.
The IRS’s ‘failure to pay’ penalty can be costly, but it can be avoided by paying your taxes on time or setting up a payment plan with the IRS. If you are unable to pay your taxes in full, it is essential to contact the IRS to discuss your options. Ignoring the ‘failure to pay’ penalty can have serious consequences, including additional penalties, interest, and collection actions. By addressing your tax debt promptly, you can avoid these consequences and work towards resolving your tax debt.