How Much Penalties Can the IRS Charge Me?

On: January 25, 2019

The IRS applies late penalties and interest on a case-by-case basis and will send a separate bill if penalties apply. Because the IRS has the last word on penalties, we can’t calculate the exact amount if your return is late. But the info below will give you an idea of what to expect in a worst-case scenario (courtesy of IRS Tax Topic 653).

• No penalty if you’re getting a tax refund.
  • However, you must file your 2016 taxes by April 18, 2020 (or October 16 of 2020, if you filed an extension). After that, any unclaimed tax refunds get turned over to the U.S. Treasury.
• No penalty if you file by October 16, 2017, provided you filed an extension and paid your tax bill by April 18, 2017.
• Late filing penalties apply if you owe taxes and didn’t file your return or extension by April 18, 2017, or if you filed an extension but failed to file your return by October 16, 2017.
  • The late filing penalty is 5% of the additional taxes owed amount for every month (or fraction thereof) your return is late, up to a maximum of 25%.
  • If you file more than 60 days after the due date, the minimum penalty is $205 or 100% of your unpaid tax, whichever is less.
• Late payment penalties apply if you didn’t pay taxes owed by April 18, 2017, regardless of whether you filed an extension or not.
  • The late payment penalty is 0.5% (1/2 of 1 percent) of the additional tax owed amount for every month (or fraction thereof) the owed tax remains unpaid, up to a maximum of 25%.
  • For any month(s) in which both the late-payment and late-filing penalties apply, the 0.5% late-payment penalty is waived.
• Interest (compounded daily) starts accumulating on unpaid taxes one day after the due date of the return, until the bill is fully paid off. The current interest rate is 4.18% (3% on top of the federal short-term rate of 1.18%) and is subject to change (reviewed every 3 months). It accrues daily, making much more expensive than it looks.

Example: Let’s say you didn’t file your return by the April 18 deadline and you owe the IRS an additional $1,000. Scenario 1: You file an extension on or before April 18 and pay your $1,000 bill on April 28 (10 days late). Your penalty would be $5 (the 0.5% late-payment penalty applied to $1,000), plus another dollar or so for the interest. Scenario 2: You didn’t file an extension, and you file your return on April 28 (10 days late) along with your $1,000 payment. Your penalty would be $50 (the 5% late-filing penalty applied to $1,000), plus another dollar or so for the interest. Scenario 3: You file your return 5 years late, along with your $1,000 payment. Your penalty would be around $482 (the maximum late-filing penalty of 25% applied to $1,000, plus 4.18% interest compounded daily assuming the interest rate doesn’t change).