Many people have been reaching out to me to learn specifically about what they are up against for failing to hit the tax deadline of April 15th. To help those of you in this situation I’ve highlighted below what I believe to be the top 10 most valid points in regards to IRS bills, penalties and interest charges as detailed in IRS Publication 594 The IRS Collection Process.
1. Federal income tax returns are systematically checked for mathematical accuracy. If there is any money owed, you will be sent a bill. So don’t worry so much about math errors on the federal tax return as it will be caught. Generally speaking if you catch a math error after the tax return was submitted it can make sense in many instances to wait for the IRS to contact you with the changes before going through the brain damage of filing an amended federal income tax return. The tangible cost incurred for waiting will be the assessed penalties and interest for the difference between the original underpayment and the actual balance owed.
Keep in mind too that a math error on a federal tax return will also impact your state income tax return and various states react differently to errors. So you will want to reach out to your state department of revenue with any necessary adjustments as soon as they are discovered.
2. Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate, determined quarterly is the federal short-term rate plus 3 percent compounded daily. This in and of itself is not so onerous however when penalties are added in a $10,000 balance due for example can jump to $15,000 in approximately 5 months.
3. If you file a return but don’t pay all amounts shown as due on time, you will generally have to pay a late payment penalty of one-half of one percent for each month, or part of a month, up to a maximum of 25%, on the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If you file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.
4. If you owe tax and don’t file on time, the total failure to file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100 percent of the tax owed.
5. In that you must file your return and pay your tax by the due date to avoid interest and penalty charges, oftentimes the funds necessary to pay your tax can be borrowed at a lower effective rate than the combined IRS interest and penalty rate.
6. To ensure your payment on a bill for tax is credited properly, be sure to return the tear-off stub on your bill. Make your check or money order payable to the United States Treasury. Enter the primary social security number or employer identification number, the tax year and form number, and your telephone number on your check or money order.
7. The penalties for filing and paying late may be abated if you have reasonable cause and the failure was not due to willful neglect. If you’re billed for penalty charges and feel you have reasonable cause, send your explanation along with the bill to the IRS Service Center that sent you the bill.
8. Making a late payment as soon as you are able may help to establish that your initial failure to pay was due to reasonable cause and not willful neglect. Generally, interest charges are not abated; they continue to accrue until all assessed tax, penalties, and interest are paid in full.
9. There are possible exceptions to the general deadlines for filing a return and paying tax. One possible exception is if you are a member of the armed forces and are serving in a combat zone. Refer to Publication 3, Armed Forces’ Tax Guide, for additional information and qualifications. Another is if you are a citizen or resident alien working abroad. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for details. The IRS also has the authority to extend filing and payment deadlines in certain disaster situations. For more information, enter “disaster” in the search box on IRS.gov.
10. If you believe there is an error on your notice or bill, write to the IRS office that sent it to you within the time frame given. You should provide photocopies of any records that may help correct the error. Also, you may call the number listed on your notice or bill for assistance. If you are correct, they will make the necessary adjustment to your account and send you a corrected notice. If you do call be prepared for long wait times on hold and also be prepared for inconsiderate unhelpful phone operators. Keep in mind the IRS phone banks are generally speaking usually staffed with morons and try to maintain a calm demeanor when communicating with them over the phone as some of them are also devious. I have found that in most cases it is usually best to deal with the IRS in writing.