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How Penalties Are Calculated For Late Income Tax Payments

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How Penalties are Calculated for Late Income Tax Payments.

What Happens After April 15?

If you have to pay income tax, it’s important to file and make your payments on time.  The IRS assesses penalties against late tax payments, and the cost gets steeper the longer you wait.  Even filing for an extension doesn’t prevent late penalties, though it can reduce the amount you’ll have to pay.

Filing for an extension

When you file Form 4868, you receive a six-month extension that slides your tax filing deadline from April 15 to October 15.  However, the extension is not for making payments—only for filing your tax forms.  In order to avoid late penalties on taxes you owe, you must pay at least 90% of the amount due on or before April 15.

Also, if you pay 90% by April 15 and file Form 4868, interest will still be accrued on the remaining amount owed, at “the federal short-term rate plus 3 percent.”

Regular penalties for unpaid income tax

If you don’t pay your income taxes on time, in addition to the accruing interest rate, the IRS assesses a penalty of 0.5% of the total amount you owe, each month, which continues until you reach the maximum 25% penalty—or until you’ve paid the entire amount owed.

These penalties are in addition to the aforementioned interest, which accrues daily.

Installment agreements

If you can’t afford to pay the entire amount of income tax you owe, the IRS will allow you to apply for an installment agreement, which allows you to make monthly payments on your taxes.  There is a variable fee for setting up an installment agreement, depending on factors like income level and payment method.

The penalty assessed on installment agreement payments is lower: 0.25% of the amount owed.  Again, interest charges of 3% over the federal short-term rate accrue daily.

File early, pay promptly

The sooner you file and pay your income tax, the less it will cost you.  It’s best to pay the amount you owe right away, but if that’s not possible, you can file for an extension or an installment agreement and end up paying less than you would if you simply sent the payment in late. 

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