Making Late Tax Payments
OK, so you think (or know) that you owe more taxes that you have money to pay.
What do you do? Do you delay filing until you can pay?
Better think again.
There are there different areas that can cost you money with the IRS related
to delays:
- Interest on unpaid taxes
- Penalty for late payment
- Penalty for late filing of your tax return
The worst of these is the last!
- Interest on unpaid taxes
This runs about how you would expect. At this writing the annual interest charge
on unpaid taxes is 8%, which is a pretty good rate currently for unsecured loans.
Of cocurse the IRS has the abiity to go after your assets if you do not pay, but
that is still a lot more work than a bank would need to do to collect a loan
where you secured it with them already.
- Penalty for late payment
This is an additional fee of 0.5% for each month or fraction thereof that payment
is late. So consider if you owe $1000 when taxes are due in April. If you fail to
pay on time, then interest accrues daily at the then-current rate (8% now).
But there is an additional penalty of $5 per month, up to $25 maximum, on
top of the late interest. So if you pay on April 25, the late-payment penalty
is $5. If you pay on May 1 the late-payment pealty is $10. Again, that is on
top of the interest charges. So if effectively changes that 8% fee into
a 14% fee. Ouch!
- Penalty for late filing of your tax return
This is the real ugly one. This penalty is assessed if you simply do not file
your return on time, nor request an extension by the regular due date. This
penalty is 5% per month, with a limit of 25%. The only nice thing is if you are
hit with this penalty, the IRS will waive the late-payment penalty. So let us
assume that you did not have the $1000 you owed, so you filed your return,
with the full payment, on April 25. Your late-filing penalty will be $50.
There will also be interest charges. Wait until May 1 and the late-filing
penalty is $100. On June 1 the penalty goes to $150, plus interest!
Double ouch!!
So it should be pretty obvious that you do not want to delay filing your return,
regardless of your ability to pay the taxes.
And about those extensions.... The IRS will grant an extension to file your
tax return upon request, if requested before the regular due date. That will
help you avoid the 5% per month late-filing penalty for 6 months.
But that does not permit you to delay paying your taxes.
If taxes are not paid by the April due date
then you will be charged interest plus the late-payment penalty of 0.5% per
month until it is paid.
If you anticipate considerable delays to file, then talk to us about making
a tax deposit rather than a tax payment. There are differences
and they can affect the ability to obtain a refund of over payments at a later
date.
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