April 15 is the officially recognized deadline for most taxpayers to file their tax returns and pay the IRS any tax that is owed. When processing these individual tax returns, the IRS examines each for mathematical accuracy and any other errors. At the completion of processing, the IRS will send a bill for any tax, penalties and interest you owe. This is not usually a time for celebration, as most unpaid taxes are a result of computation or withholding errors, and are not an attempt to defraud the government.
How Penalties and Interest Accrue
Regardless of the reasons, any unpaid tax is due on April 15, and any amounts that remain unpaid after that date incur penalties and interest.
- Interest accrues on any amount of unpaid taxes beginning from the due date of the return and continuing until the date the amount is paid in full. This can happen in one of two ways:
- The quarterly rate, known as the federal short-term rate, is typically 3% per quarter or 12% per year. This is not a set rate and can change each quarter. This is the typical rate for businesses.
- The monthly rate is between .5% and 1.51% and is compounded daily. This is the typical rate for individual taxpayers.
- A Failure to Pay Penalty is incurred when you file a tax return but do not pay all the amount of tax owed. This penalty can range from .5% – 1% for each month or part of a month, up to a maximum amount of 25% of the amount of unpaid tax remaining. This rate can increase to 1% if the tax remains unpaid 10 days after an IRS Notice of Intent to Levy.
- Important note: If you file a return by the due date and request an installment agreement from the IRS, the .5% rate decreases to .25% for every month the installment agreement is in effect.
- A Failure to File Penalty is incurred if you fail to file your tax return on time. This penalty is usually 5% for the first 5 months and maxes out at 25% of the total tax owed very quickly.
How Can I Reduce Any Penalties and Interest?
The only way to completely avoid any interest or penalties is to file on time and pay on time. In most cases, if you can borrow the necessary funds to pay any owed taxes, that’s recommended because you will get a much lower interest rate than the combined IRS interest and penalty rate.
Moreover, if the IRS formulates your installment agreement, you will rarely if ever know your end date. With the complicated means of computing interest and no clear end in sight, the $30,000 you owe in taxes can become $40,000 or more. That’s a huge addition to an already cumbersome tax burden.
To avoid high penalties and interest, you need to structure a formalized installment agreement now. Reliance Tax Group can stop the excessive charges by assisting you in negotiating with the IRS. Our services are always contracted for a flat fee with absolutely no hidden extra charges to add to your burden. Contact Reliance Tax Group today by email at firstname.lastname@example.org, call 720-452-2915, or contact us online.