Penalties for Back Taxes
If you fail to pay your income taxes, you can face steep penalties and interest charges. You will also be assessed these fees if you file your income tax return late. There are interest charges for any unpaid balance, penalties for failing to pay your taxes on time, and penalties for failing to file your return on time.
Interest starts accumulating the day that your tax return is due. This is true regardless of whether you have an extension to file your tax return. Even if you have an extension, the extension does not change when your tax payment is due, even if your return due date has changed. You must still pay any taxes owed by the time your return is due.
The interest rate that you will be charged is based on the federal short-term rate. Usually, this rate is below one percent, but it does change every three months because it is a quarterly interest rate. Take this federal short-term rate and add three percent to determine the percentage that you will be charged in interest for any underpayment of taxes. The interest rate is typically between three and four percent.
The interest only applies to the unpaid balance, so in most circumstances, it's in your best interest to pay as much as you can, even if you cannot pay the entire balance due.
If you do not pay your taxes on time, you will be assessed a penalty for late payment, which is sometimes called a "failure to pay penalty." Like the interest rate, this penalty varies depending on how much you still owe in taxes. As you delay paying your taxes, the penalty increases as well. The penalty is 0.5 percent of the tax owed for each month or portion of one month that you are late. The penalty can increase to one percent. However, this will only occur if two things happen: 1) if the IRS has to issue several notices about your late payment, and 2) the IRS informs you that it intends to seize or levy a tax, fee or fine on property. Usually, you have ten days after the notice to forfeit your property before the penalty increases to one percent. This penalty is capped at 25 percent.
The penalty will still apply even if you are making installment payments on your taxes. The penalty is 0.25 percent for every month of the installment agreement, which is half of the penalty if you do not arrange an agreement.
There is also a penalty for failing to file your tax return. This penalty will only apply if you failed to file and owe taxes. If you do not owe anything, or if you are expecting a refund, then there is no penalty for failing to file.
The penalty for failing to file is 4.5 percent of your taxes due for each month that your return is late. When considering both types of penalties, the total penalty amount can be up to 47.5 percent of the tax owed.
If your return is over 60 days past due, the IRS will charge you at least $205 or 100 percent of the required tax, whichever is lower. This means that you will pay double in the end.
Q&A: Can you go to jail for not filing a tax return?
Yes, it is possible to go to jail for not filing your taxes. This is similar to taxpayers trying to evade paying taxes or filing fraudulent returns both which are also jailable offenses. You won't, however, go to jail if you do file but can't pay your tax bill. So, aside from the failure-to-pay penalties you may receive, this is yet another reason why you should always file a return even if you cannot pay what is owed.
The penalties for not filing a return:
Failure to file a tax return can result in up to a year of jail time for every year you neglect to file a return. Tax evasion, where you lie on your tax return to pay less, can result in up to five years of prison time. You can also go to jail for trying to help someone else with tax evasion.
The bottom line is that failure-to-file receives much stricter punishment than failure-to-pay.