If you have failed to pay your federal income tax for two years in a row, the Internal Revenue Service will add penalties and interest to your debt. Eventually, it will take collection action against you. Several different types of penalties apply depending on your circumstances. If you contact the IRS, in most cases they will be willing to compromise with you rather than begin collection action.
Failure to File, Failure to Pay
If you owed federal income taxes. the penalty for failure to file a tax return on time is 5 percent of the tax owed per month or part of a month that you are late, capped at 25 percent of the amount you owe. The penalty for failure to pay your taxes is 0.5 percent per month or part of a month that you fail to pay, capped at 25 percent of the amount you owe. If your return is filed at least 60 days late, however, a minimum fine will apply – the lesser of $210 or 100 percent of the amount you owe. If you fail to respond to several notifications, the IRS may raise your failure-to-pay penalty to 1 percent per month.
Interest on Unpaid Taxes
The IRS will also assess interest against your unpaid taxes from the due date until they are paid in full. As of 2018, the interest rate was equal to the federal short-term interest rate plus 3 percent, with interest compounding daily. Interest is not capped the way penalties are. It is often cheaper to borrow money to pay your taxes than allow your debt to accumulate interest at the IRS rate.
Other Income Tax Penalties
The IRS calls itself a pay-as-you-go system, meaning you are expected to make tax payments as you earn income throughout the year. If your tax delinquency arose because you did not have enough money withheld from your paycheck or did not make quarterly payments if self-employed, you may be subject to an additional penalty determined by the IRS. In addition, if the IRS considers your return to be frivolous – if, for example, it doesn't contain enough information to calculate your taxes, the IRS could fine you $500. The IRS has the power to place a lien against all your property to secure your tax debt, and to auction your property.
Late Tax Payment Options
You may seek an installment payment plan from the IRS by filing Form 9465. If you owe more than $25,000, you must make payments via direct debit. Penalties will continue to accumulate, but the IRS will not take collection action as long as your payments are current. You can also discharge some tax debts in bankruptcy. If the IRS places a lien against your property, you are entitled to a hearing. In some cases, you may appeal an adverse decision to the federal tax court.
- IRS: Filing Past Due Returns
- IRS: Topic Number 653 - IRS Notices and Bills, Penalties, and Interest Charges
- IRS: Topic Number 306 - Penalty for Underpayment of Estimated Tax
- Internal Revenue Service. "Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges." Accessed March 13, 2020.
- Internal Revenue Service. "Understanding your CP504 Notice." Accessed March 13, 2020.
- Internal Revenue Service. "Interest Rates Remain the Same for the First Quarter of 2020." Accessed March 13, 2020.
- Internal Revenue Service. "Topic No. 202 Tax Payment Options." Accessed March 13, 2020.
- Internal Revenue Service. "Pay Your Taxes by Debit or Credit Card." Accessed March 13, 2020.
- Internal Revenue Service. "Offer in Compromise." Accessed March 13, 2020.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.