Avoiding Penalties and Interest on Failure to Pay Taxes by Angie Adames, CPA
Posted on March 31, 2023
by
Angie Adames
Gathering required documents and preparing to file federal tax returns each year can become a very cumbersome process. While U.S. tax laws allow individuals to request a six-month filing extension, they require individuals to pay their 2022 tax bills by the original April tax filing deadline, which, for 2023, is April 18. Failure to pay by this deadline will result in penalties and accrued interest unless taxpayers reach out to the IRS to request relief.
Individuals who owe taxes and fail to file a federal income tax return are subject to a penalty of 5 percent of the unpaid amount for each month they fail to file, up to a maximum of 25 percent. Tax returns that are more than 60 days late face a failure-to-file penalty of the lesser of $450 (for tax returns required to be filed in 2023) or 100 percent of the tax due. If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5 percent (4.5 percent for a late filing and 0.5 percent for a late payment) for each month or part of a month that your return was late, up to 25 percent. In addition, interest charges will accrue based on the amount of tax owed and for each day that amount goes unpaid. The interest rate applied is determined every three months and can vary based on the type of tax due.
When taxpayers find it challenging to pay their tax liabilities in full by the April deadline, they may take advantage of one of the following relief options offered by the IRS:
Payment Plans
Taxpayers or their tax accountants may contact the IRS directly to apply for a short-term or long-term payment plan based on the amount of tax they owe. For example, taxpayers who owe less than $100,000 in combined tax, penalties, and interest may qualify for a 180-day or less payment plan. If the total amount owed is less than $50,000, taxpayers may instead qualify for a monthly payment plan that extends beyond 180 days.
Offers in Compromise
Taxpayers may qualify for an offer in compromise with the IRS to settle their tax debt for less than the full amount they owe. This form of relief is based on a taxpayer’s unique circumstances, including the prospect that a full tax payment would create financial hardship for the taxpayer.
Penalty Relief
Taxpayers may also qualify for penalty relief if they try to comply with tax laws to meet their tax obligations but are unable to do so due to circumstances beyond their control.
About the Author: Angie Adames, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
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