IRS – Late Filing Tax Return Penalties – Need Some Motivation?

by Mike Holman

If you are still working on filing your taxes with the IRS after the April 15th deadline or perhaps you haven’t even thought about doing your taxes then you need to read this article – all the various financial penalties will be outlined.  Once you have finished this article, then you should be more motivated to finish your tax return.

Read about the 2010 tax deadline for your 2009 taxes.

If you thinking about buying tax preparation software then consider software programs such as TurboTax or TurboTax Canada (formerly QuickTax).

Failure to file penalty

This is the big one - if you don’t file your tax return or an extension by April 15th then you will get nailed for the failure to file penalty.  This also applies if you get an extension to file your tax return and miss the new deadline.

How much is the failure to file penalty?

The penalty is 5% of the tax balance due per month up to a maximum of 25%.  A new month starts on the 15th of each month so if you file on May 18th then you will pay 2 months penalty or 10%.  This is the biggest penalty by far so it’s important to file your tax return as soon as you can even if you don’t have a penny to pay the money owed.  If you don’t owe any money then there is no penalty.

For example if you owe $1000  and file your taxes 1 week after the deadline then your failure to file penalty will be $50 ( 5% of $1000).  Keep in mind that if you file more than 60 days past the deadline then the minimum failure to file penalty will be your unpaid tax or $135 whichever is smaller.

If you owe $1000 and don’t file for 5 months or more then the failure to file penalty will be 25% or $250!

Late payment penalty

The late payment or failure to pay penalty is applied when you have filed your tax return but didn’t pay the full balance owed.  In that case the penalty will be 0.5% of the balance due per month.  There is no maximum amount for this penalty so it can add up.  If you can’t pay your full balance by April 15th then you should try to pay as much as you can to reduce the penalty.  There is no late payment penalty if you don’t owe any tax money.  If this penalty is applied then the late filing penalty drops to 4.5%.

For example if you owe $1000 and you don’t pay for 6 months then the penalty will be $30 ( 6 x 0.005 x 1000).

Interest charged on balance due

The last penalty for late payment is interest – currently the IRS charges 4% interest on late payments.  This interest rate can change quarterly.

For example if you owe $1000 and pay 6 months late – then the interest charge will be $20 (2% of $1000).

What are my total charges on $1000 paid 6 months late?

Failure to file penalty:  4.5% of $1000 per month for 6 months = $270.  (This is only 4.5% because the late payment penalty is applied).

Failure to pay penalty:  0.5% of $1000 per month for 6 months = $30.

Interest:  4% annually for 6 months on $1000 = $20.

Total = $320 – in other words your tax balance due will have increased by 32%.  So get that return in!

More information

What happens if you didn’t file your taxes?

What if I messed up my taxes?

What should I do if I can’t pay my taxes?

What happens if you don’t file your tax return?

Do I need a tax attorney?

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