Individual income taxes are the primary source of revenue that funds the operation of the federal government. The Internal Revenue Service is the federal agency charged with collecting those taxes, and it takes its job very seriously. If you are late paying your federal income taxes, get ready to pay a hefty penalty.
Pay As You Go
The U.S. federal income tax system is a pay-as-you-go system. If you work as an employee, your employer must withhold money from your paycheck and send it to the IRS to apply toward your tax bill. If you are self-employed you must typically make quarterly tax payments. The due date for filing your federal income tax return each year is April 15, unless that date falls on a weekend or federal holiday. If the amount you've already paid to Uncle Sam is less than your total tax bill, you have until then to make up the difference.
If you can't file your taxes by the original due date, the IRS will grant you an automatic six-month extension to file. All you have to do is ask. That six-month extension only applies to filing your return. It does not apply to paying your taxes. The full amount of any taxes you owe must be paid by the original due date. If you're late, the IRS will hit you with interest and late payment penalties.
The IRS's late payment penalty kicks in as soon as the due date passes. There is no grace period. If you fail to pay your taxes by the due date, the penalty is .5 percent of the unpaid balance for each month or part of a month until the entire tax bill is paid. The penalty caps out at 25 percent of your unpaid taxes. The interest on late taxes due was 3 percent of the unpaid balance, compounded daily, as of the 2012 tax year.
The IRS is actually harsher on taxpayers who fail to file on time than it is on taxpayers who don't pay on time. The failure-to-file penalty is typically 5 percent of the amount of your unpaid taxes for each month or part of a month that you don't file your return, up to a maximum of 25 percent of your unpaid taxes. If it looks like you can't pay your tax bill in full by your original due date, you will only make matters worse by not filing your tax return. You can save some money on penalties by either filing your return on time, or requesting an extension to file later.
If you can't pay your tax bill in full by your original filing due date, you can reduce the amount of your interest and penalties if you qualify for an IRS installment payment plan. If you qualify for a short-term extension, you'll have up to 120 days to pay your taxes. The IRS doesn't charge a fee for this plan, but you'll still be responsible for interest and the late-payment penalty. Longer-term monthly payment plans are also available, but the IRS will charge a fee ranging from $43 to $105 as of 2012 to set up such a plan. You'll still have to pay interest on the unpaid balance, but the IRS will reduce the late-payment penalty to .25 percent if you filed your return on time.
- Internal Revenue Service: Failure to File or Pay Penalties: Eight Facts
- Internal Revenue Service: Topic 653 - IRS Notices and Bills, Penalties and Interest Charges
- Internal Revenue Service: Filing Late and/or Paying Late
- Internal Revenue Service: Payment Plans, Installment Agreements
- Internal Revenue Service: Payment Options Available for Those Who Can’t Pay in Full
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.