The Penalties For Late Payment of Taxes
If you have missed the tax return deadline then you are likely to face late payment penalties. Even if you have filed an extension (see our piece here) you are likely to have to pay penalties as well as interest on your tax liability.
Our guide looks at what the penalties are if you file your tax return late.
Extensions for filing
Even if it’s only a few days that you need you should use form 4868 to file for an extension if your tax return is going to be late.
There are people who do receive an automatic extension to filing their tax returns. These include:
- US taxpayers who live and work abroad (a two month extension to June 15)
- Military personnel serving in combat zones (a 180 day extension)
- Victims of a Presidentially declared disaster/terroristic/military action (a one year extension)
Late payment penalties when you file for an extension
Filing a tax extension does not suspend interest from accruing on your tax liability and neither does it necessarily prevent penalties for not paying by the due date.
The IRS assesses a late-payment penalty if you do not pay 90 per cent or more of your unpaid tax by April 15, even if you have filed Form 4868.
For example, let’s say you owe $4,000 in taxes: $4,000 x 0.90 = $3,600.
If you don’t pay at least $3,600 when you file Form 4868, the IRS will assess a late-payment penalty. The penalty is 0.5 per cent of the amount you owe per month and this penalty continues until you have paid the maximum 25 per cent penalty. Using the example above, the late-payment penalty would be $4,000 x 0.005 = $20 per month (up to 25 per cent, or $1,000.)
The sooner that you pay off the unpaid taxes, the less you will pay in penalties.
Late payment penalties if you do not file for an extension
If you do not apply for the filing extension, the late filing payment fee is 4.5 per cent of the unpaid tax per month up to five months.
Using the example above, this would be $4,000 x 0.045 = $180 per month.
Interest payments
As well as late payment penalties, any tax you owe after April 15 will also accrue interest. A filing extension is not a payment extension and so this interest, which is compounded daily, will continue to accrue for as long as you owe tax. As with late-payment penalties, the sooner you pay off the tax, the less interest you’ll pay.
The interest rate on unpaid tax is ‘the federal short-term rate plus 3 per cent’.
Using the above example (in which you owe the IRS $4,000) and an interest rate of 4%, you’d pay interest of $160 and a penalty of $20 per month, totalling $180.
So you would owe $180 for every month you don’t pay in addition to the $4,000 in taxes you already owe the IRS.
Installment agreements
If you file your tax return on time and apply for an installment agreement, the IRS reduces your late payment penalty from 0.5 per cent to 0.25 per cent per month.
Using the example above this would be $4,000 x 0.0025 = $10.00 per month.
If I file for a tax extension, that will mean I don’t pay any interest on the tax I owe, right?
Clare – no, that is not correct. Unfortunately, a filing extension is not a payment extension and so you will pay interest as long as you have tax outstanding.
The interest rate on unpaid tax is ‘the federal short-term rate plus 3 per cent’.