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Federal Income Tax Penalties: File on Time, Even if You Cannot Pay on Time

Edge Magazine

For many years I’ve advised clients the IRS is the worst creditor to have. Why? The IRS, like many creditors, charges interest if you do not pay the amount you owe on time. But the IRS also imposes penalties, which add up quickly and result in a much larger liability than just the income tax you owe.

If you can’t afford to pay your income tax bill on time, you should still file your tax return by the filing deadline. When you file, pay as much of your tax bill as you can – even if you can’t pay the whole bill. It is a crime not to file your return and the IRS imposes the “failure-to-file” penalty of 5% of the amount you owe each month your return is late, up to 25%.

If you file your return on time, but do not pay your entire tax bill, the IRS imposes the “failure-to-pay” penalty equal to one-half of one percent (0.005%) each month until you pay your outstanding balance. If you fail to file and fail to pay, the maximum penalty per month is 5%.

Consider the following examples to illustrate the impact of the failure-to-file penalty. Taxpayer owes $5,000 in April. In Situation A, Taxpayer files and pays in September. In Situation B, Taxpayer files her return on time, but pays in September.

Situation A: File and Pay Late
Tax Owed: $5,000
Interest (presume 4%): $100
Failure-to-File Penalty & Failure-to-Pay Penalty*: $1,500
[*Combined maximum 5%.]
Total: $6,600

Situation B: File Timely, Pay Late
Tax Owed: $5,000
Interest (presume 4%): $100
Failure-to-File Penalty: $0
Failure-to-Pay Penalty: $150
Total: $5,250

If you can’t pay on time, you should consider obtaining a loan at a lower interest rate than the effective rate you’ll pay the IRS for interest and penalties. Alternatively, you may be able to work out a payment plan with the IRS, depending on your income, allowable living expenses, assets, and your compliance history. Interest and penalties will still accrue with an installment agreement, but the IRS won’t take adverse action against you, such as filing a tax lien or seizing your assets.

To avoid this situation in future years, be sure you are withholding the proper amount of tax from your paycheck. If you are self-employed, be sure you file and pay quarterly estimated withholding payments. Work with an accountant and tax adviser to navigate the issues.


I am a shareholder of Koley Jessen P.C., L.L.O., located in One Pacific Place. My practice is focused on estate and tax planning. Outside of the office, I enjoy spending time with my husband and our three children. For help with your family’s estate planning needs, please contact me directly at 402.343.3881.


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