It’s that time of year when you may be thinking…my tax return (or extension) has been filed, but I cannot pay the balance due. What should I do?
If you haven’t filed a return or extension, a return or extension should be filed as soon as possible. Many taxpayers assume that they should wait to file their return or extension until they can pay the tax balance due in full. Often, this is not the best approach. If you owe taxes and do not file your return or extension timely, the IRS can impose a significantly higher late-filing penalty than the late-payment penalty.
The failure-to-file penalty is generally 5% of the unpaid tax for each month, or part of a month, that the return is late, capped at 25% of the unpaid tax. If a return is more than 60 days late, the minimum failure-to-file penalty is the lesser of $525 or 100% of the tax shown on the return.
By contrast, the failure-to-pay penalty is 0.5% of the unpaid tax for each month, or part of a month, that the balance remains unpaid, capped at 25% of the unpaid tax. If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5%, which is comprised of the 4.5% late filing penalty and 0.5% late payment penalty, up to a maximum of 25%.
In other words, even if you cannot pay your total tax bill due right now, it is often more advantageous to file on time and pay as much as you can.
The IRS offers several options for taxpayers who are unable to pay their entire balance due. The right approach to handling your tax bill includes considerations such as the total balance due, and your current financial situation. Options include:
- Short Term Payment Plans (generally deferring payment for 180 days)
- Installment Agreements (A more long-term option, that provides for monthly payments to be made)
- Temporary delays of collection activity or currently not collectible status
If you need guidance navigating these options or determining the best strategy for your situation, our tax attorneys are here to help.
