When you happen to pay taxes late or miss filing tax returns, there are certain consequences and penalties you will incur.
In this article:
- What Are the Consequences of Unpaid Taxes?
- When Do You File Taxes?
- How Are Tax Penalties Computed?
- When Do You Not Have to File Taxes?
- What Is an Installment Agreement?
- What Happens When I Am Put on Offer in Compromise (OIC) Status?
- How Does First Time Penalty Abatement Works (FTA)?
What Happens If You Fail to Pay Taxes | Consequences and Penalties
What Are the Consequences of Unpaid Taxes?
Having unfiled and unpaid taxes merits consequences depending on several factors, including the taxpayer’s situation. The IRS regulates several types of tax penalties such as failure to file, failure to pay, failure to pay proper estimated taxes, and dishonored checks.
The first thing that the IRS has to determine is whether a tax return has been filed or not. Apparently, failure to file and pay taxes results in penalties ten times higher than the penalty for not paying taxes alone. This is why it is important not to miss filing your taxes.
When Do You File Taxes?
The IRS generally begins accepting tax returns the last week of January. It is expected that all tax returns are filed by the due date, April 15, or the extended due date once an extension to file is requested and approved. Failure to do so results in a failure to file tax penalty.
How Are Tax Penalties Computed?
The failure to file the tax penalty rate is set at 5% of unpaid taxes required to be declared. This rate applies for up to five months of filing the tax return late. When the return is filed less than 30 days from the due date, the full month’s worth of tax penalty still applies.
The penalty for failure to pay is at 0.5% of taxes not paid by the due date, April 15. When under an installment agreement, a 0.25% tax penalty rate applies. A 1% penalty applies when the payable remains unpaid within ten days of a notice of intent to levy. There will also be recurring charges on the remaining unpaid taxes for each month or part of a month following the due dates until it is paid in full or until it reaches the 25% maximum rate. The full monthly charge still applies even when the taxes become fully paid before a month ends.
The IRS only requires payments for estimated taxes when a taxpayer expects to owe at least $1,000 worth of taxes after deducting the withholding and refundable credits. The computation for the tax penalty of this case can be calculated using Form 2210.
In the case of dishonored checks and other forms of payments, the tax penalty is the amount of the tax payment or $25, whichever is lower. For tax payments of $1,250 or more, the tax penalty is 2% of the tax amount.
When Do You Not Have to File Taxes?
Not everyone is required to file a tax return each year. There are several factors to determine whether to file taxes or not. Some of these factors include a taxpayer’s filing status, age, and gross income. When a taxpayer’s income for a taxable year does not exceed certain thresholds, filing a tax return is not necessary.
What Is an Installment Agreement?
An installment agreement, or a payment plan, refers to an agreement between a taxpayer and the IRS to pay taxes owed within an extended time. When the IRS approves a payment plan, the taxpayer is required to pay the amounts payable within the extended due dates or else a Notice of Federal Tax Lien and/or IRS Levy Action will be filed. Click here to know more about IRS installment agreement plans.
What Happens When I Am Put on Offer in Compromise (OIC) Status?
Offer in Compromise is a form of tax relief offered to the taxpayers which creates an agreement with the IRS allowing them to settle tax liabilities for less than the actual amount owed. To qualify, a taxpayer should have filed all tax returns and settled all estimated tax payments for the current year.
How Does First Time Penalty Abatement Works (FTA)?
FTA is an administrative waiver offered by the IRS as another form of tax relief to qualified taxpayers. It refers to a waiver that the IRS may grant to taxpayers under certain criteria.
- When a taxpayer didn’t previously have to file a return or has no penalties for the last 3 years.
- If a taxpayer filed all tax returns on time or on the extended time of filing.
- When a taxpayer has paid or arranged to pay any tax due.
The whole process of preparing taxes brings a lot of challenges to most taxpayers. This sometimes causes missed deadlines and late payments. Avoid paying extra charges and penalties by making sure you know the tax due dates and pay your taxes on time.
Have you ever experienced issues paying for your taxes? Share your thoughts with us in the comments section below.