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Penalties and Interest

Penalties and interest apply to taxes that are not paid in full by the due date and to tax returns not filed by the due date.

If you have an unpaid tax debt, penalties and interest will accrue until the debt is paid in full. Penalties and interest do not apply in years when you are entitled to a refund.

The penalty charged for filing late is generally 5% per month, up to 25% of the amount of tax due on the return.

The penalty charged for paying late is 1/2 of 1% per month, up to 25% of the total unpaid amount due.

Interest is calculated on the unpaid balance, penalties, and interest that have been charged to the tax account. While making partial payments on an unpaid balance, penalties and interest will continue to accrue on the unpaid portion, even as your debt increases due to compounded penalties and interest. The interest rate used to determine interest charges changes quarterly with federal interest rates. Interest rates can vary widely, and have recently been from 4 to 7%.

If you have tax debt that is accruing interest and penalties, you might want to consider borrowing to pay the entire debt, because interest rates on loans may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. Other options to pay your debt include:

  • Cash advances from a credit card
  • Bank loans
  • Borrowing against your 401(k), life insurance, etc.
  • Using equity in real estate or other assets

If taxes are not paid and no effort is made to pay them, the IRS can ask you to take action to pay the taxes. The actions you are asked to complete may include selling or mortgaging assets. If you still do not take action after a request, the IRS may take enforced collection action, including levying bank accounts, wages or other income, or seizing your assets. A notice of Federal Tax Lien could be filed, which will harm your credit rating.

You should always contact the IRS if you are unable to pay your tax debt. In some situations the IRS is willing to offer extensions of time to pay or relief from penalties and interest. Other debt relief options include installment agreements with the IRS, or an offer in compromise. You can contact the IRS at (800) 829-1040 or by visiting a local IRS office.