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irs penalties

IRS Penalties and Interest

January 16, 2015  |   Last modified on June 10, 2021

If you owe back taxes, your balance steadily grows each month that it remains unpaid. After the filing deadline has passed, the IRS will begin to charge both penalties and interest on the amount owed. These charges can quickly increase your balance.

The IRS stops charging penalties and interest only after you have resolved your tax debt permanently or the entire tax debt is forgiven. There are two types of penalties charged on a tax debt, which are explained below.

Failure-to-Pay Penalty

A failure-to-pay penalty is charged when you file your taxes but do not pay your full tax liability. The penalty charged for failure-to-pay is 0.5%. This type of penalty is charged each month on the total tax debt.

Failure-to-File Penalty

If you are required to file a return and you do not file, the IRS will charge a failure-to-file penalty. The penalty amount is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty, however, won’t exceed 25% of your unpaid taxes. If your return is over 60 days late, the minimum penalty amount will be $435 or 100% of the tax required to be shown on your return, whichever is less.

What Happens If I’m Charged Both Penalties?

If both penalties are applied in the same month, the Failure-to-File Penalty will be reduced by the amount of the Failure-to-Pay Penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.

After five months, if you still haven’t paid, the Failure-to-File Penalty will max out, but the Failure-to-Pay Penalty will continue until you pay your taxes in full or reach the 25% maximum allowed.

Interest Fees

In addition to penalties, the IRS also charges interest on the tax debt. The interest is charged at the federal short-term rate plus 3% for a year. It is compounded daily and does not include payment extensions.

The IRS keeps charging both penalties and interest even after you have qualified for a payment plan and begin making payments. The penalties and interest stop only after the entire tax debt is paid off or the case is permanently resolved.

To avoid paying more in penalties and interest, you should make efforts to resolve your tax debt early. The earlier the resolution is achieved, the less you will pay to the IRS.