June 2024 – Interest & Penalties

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INTEREST & PENALTIES

 

OVERVIEW

With the tax filing deadline of April 15th now behind us, we want to remind taxpayers about the consequences of late tax payments, including interest and penalties.

A late tax payment occurs when a taxpayer fails to pay their due balance by the original filing deadline, which is typically April 15th each year. This situation often arises when taxpayers extend their tax returns and have a balance due at the time of filing.

Taxpayers have a few options when it comes to extensions. Some choose to extend and pay the amount due later when filing, while others prefer to extend and make a payment on or before April 15th to anticipate and cover their balance due.

It’s important to remember that an extension to file does not mean an extension to pay. Individuals who file for an extension without making a payment may face increased penalties and interest if they owe a balance when they file. Conversely, those who pay with their extension may reduce the risk of penalties and interest at filing time.

 

INTEREST

If taxpayers have a balance due to the IRS and do not pay the full amount by the filing deadline of 4/15, the IRS will charge interest on the unpaid balance.

According to the IRS, the interest rate is determined quarterly and is calculated based on the federal short-term rate (currently 5%, changes slightly each month) plus 3%. This interest accrues on the unpaid balance from the original due date of 4/15 until the balance is paid in full.

 

PENALTIES

In addition to interest charges, the IRS may impose penalties for late tax payments. The penalty for late payment is typically 0.5% of the unpaid taxes for each month or part of a month that the balance remains unpaid, up to a maximum of 25% of the unpaid taxes. This penalty is in addition to the interest charges mentioned earlier.

Penalties for late tax payments also apply for estimated taxes. As a reminder, taxpayers are generally required to make estimated tax payments if they expect to owe $1,000 ($500 for Corporations) or more with their tax return. If estimated tax payments are not made and the taxpayer owes more than $1,000 ($500 for Corporations), the IRS may assess a penalty for underpayment of estimated tax.

In many cases, taxpayers can avoid the underpayment penalty if less than $1,000 is owed in tax ($500 for Corporations) after subtracting withholdings and credits. Taxpayers can also avoid underpayment penalties by paying at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. To note: tax payments throughout the year include the amounts from W-2 withholdings.

 

SUMMARY

We understand that unexpected circumstances can sometimes make it difficult to pay taxes on time, and we also understand many taxpayers prefer to wait and pay their balances due at filing time. However, it is important to be aware of and plan for the potential risk of interest and penalties associated with late payments.

Please also note that if taxpayers are not able to pay their full balance due when they file, the IRS does offer payment plans. In some instances, payment plans can help alleviate some of the interest and penalties on late balances due. Please reach out to us if you would like us to assist you with setting up a payment plan with the IRS.

If you have any questions or concerns, please don’t hesitate to reach out to us.