Penalties & Interest: Don’t Overpay The IRS

Tax debt increases every month. Learn to take control.

Avoid additional tax penalties and interest

When you owe the IRS back taxes, the amount of your tax debt increases every month due to IRS penalties and interest. The IRS charges penalties and interest on any tax debt not paid by the filing deadline. This holds true even if you have filed for an extension. Your taxes are due April 15th, with or without the 6-month tax extension. The IRS charges penalties and interest on all unpaid balances, even after you have qualified for a tax debt payment plan and begun to make payment to fulfill your tax debt.

The Effect of Penalties and Interest

Each month, the IRS charges a penalty of a particular percentage of the unpaid taxes. In most cases, the IRS charges 0.5 percent penalties on unpaid taxes, but penalties can go up to 25 percent in some cases. It solely depends on the discretion of the IRS how much penalty they charge on tax debt. The IRS charges an additional penalty of 5 percent on taxes that have not been filed.

Fact: All penalties COMBINED cannot exceed 25 percent of the original tax debt owed.

Penalties and interest substantially increase tax debt if allowed to remain unpaid for years. Because the failure to file penalty is so high, it is ALWAYS in your best interest to file on time, even if you can’t pay your taxes right away. If you do not have the financial capability to pay your tax debt in full, you can typically use an IRS payment plan to pay in installments.

If you cannot pay any amount of your tax bill, then you may qualify for Currently Not Collectible status where the IRS postpones collection and gives you time to strengthen your financial position. In such cases, the IRS can only resume collection if your financial condition has improved. If not, they have ten years time to collect back taxes from you, after which the tax debt is typically dissolved.

Pay the Least in Penalties and Interest

To pay the least in penalties and interest, you need to resolve your tax debt case early. If you are eligible to qualify for an Installment Agreement plan, then you should pay more in the first installments to bring down the total tax debt amount to be paid. By decreasing the amount of your tax debt, you will decrease the value of the penalties and interest.

Another way to pay less in tax debt is through penalty abatement. Under this IRS program, you can receive a reduction or removal of penalties if you can convince the IRS that you did not pay or file your taxes on time because of what the IRS calls a “reasonable cause.”

Pop Quiz

Which one of the following would count as a “reasonable cause” according to the IRS definition?

a) Theft

b) Natural disaster

c) Death in the family

d) Divorce

e) All of the above

Reveal Answer

A reasonable cause is an event that was beyond your control and that you could not predict.

e) All of the above

Return to question

If such a reason led you to delay payment of taxes, then the IRS may remove some or all of the penalties charged on your tax debt. The IRS may choose to reduce penalties in some cases. The decision on whether to remove or reduce depends entirely on the judgment of the IRS agent looking at the case. The IRS is more likely to remove or reduce failure to pay penalties than failure to file penalties. The IRS is not very forgiving when it comes to unfiled taxes.

IRS penalties and interest are charged precisely to encourage taxpayers to pay their tax debt as early as possible. Even if the IRS has not initiated collection actions, penalties and interest alone provide enough reason to resolve tax debt at the earliest opportunity. The longer you wait, the bigger your tax debt grows.

If you do not feel up to resolving your tax debt on your own, you can contact a licensed tax professional or a tax resolution service. Tax professionals have experience working with the IRS to resolve tax debt, and will be able to advise you on how to best resolve your tax debt issues.