Understanding Penalties and Interest

Penalties and interest. Those are two words you don’t want to hear related to your taxes. Unfortunately, however, they are a reality for many taxpayers.

The first thing to understand is that penalties and interest do not apply in any tax year in which a taxpayer receives a refund. Instead, they apply to tax years in which the taxpayer owed money to the IRS.   

If this money is not paid by the due date, interest applies. How much interest will be charged will vary since this amount changes each quarter.

Penalties, on the other hand, generally stay the same. For example, there’s a late filing penalty, which is charged at 5% per month and can go up to 25% of the amount of the total tax due.

You will also face a penalty if you pay late. That penalty is half of a percent each month, up to 25% of the amount you owe.

When You Can’t File or Pay

Obviously, no one wants to face these extra expenses. That’s why it’s so important to file your taxes on time and to get them paid on time.

Sometimes, though, one or both of these things might not be possible. Maybe you couldn’t file due to a recent tragedy in your family or even a natural disaster. In cases like these, you may be able to get penalties waived by contacting the IRS.

For less serious matters that result in a failure to file or an inability to pay, you may be able to work out an offer in compromise or a payment plan with the IRS.

No matter what, it’s always good to keep in contact with the IRS and to show that you are willing to work with them and are doing your best. That can go a long way toward making things right and getting back on track with your taxes.