By: Todd Schanel, CFA, CPA, CFP®
on July 22, 2021

IRS Penalty-late taxes-tax filing-tax penaltiesAny tax owed on an individual tax return is generally due by April 15th even if an extension is filed. Failure to make that payment results in penalties and interest.

So how much does it cost to pay your taxes late? The examples below provide an overview.

Example 1:  Tax return filed timely but payment is late

If a tax return is filed on a timely basis (either by April 15th, or by October 15th if an extension was properly filed), but the tax due of $10,000 was not paid until December 15th (8 months late), the IRS would charge the following:

Failure-to-Pay Penalty: The failure-to-pay penalty is calculated at a rate of 0.5% per month for each month the failure to pay continues. In this case, a payment made by December 15th would incur a failure to pay penalty of 8 * 0.5%, or 4%, or $400.

Interest: Interest is charged against the original balance, based on the number of days the balance goes unpaid. The interest rate is published quarterly and is computed to the nearest full percentage point of the applicable Federal short-term rate for that calendar quarter, plus 3%. The current rate is 3%.  The interest compounds quarterly. In the example above, the interest would total $202.56.

TOTAL:  Between the interest and failure-to-pay penalty, the total cost of paying eight months late is $602, or approximately 6% for eight months, or 9% annualized.

Example 2:  Tax return filed late and payment is late

Now assume the same facts above, but instead of the tax return being filed on a timely basis, no extension was filed, and the return was ultimately filed on December 15th.

Failure-of-File Penalty: The failure-to-file penalty is calculated at 5% per month for each month the return is late, with a maximum penalty of 25%.  If the failure-to-pay penalty also applies, which in this case it does, the penalty is reduced to 4.5% per month, with a maximum penalty of 22.5%.  In the example above the total failure-to-file penalty would be $2,250.

Failure-to-Pay Penalty: There is no change to the failure-to-pay penalty. It remains at $400.

Interest: Interest is charged against the original balance AND the failure-to-file penalty retroactively. In this case, the 3% rate would be applied to $12,250 as of April 15th, compounded quarterly, bringing the total interest payment to $248.

TOTAL:  Between the failure-to-file penalty, failure-to-pay penalty, and interest, the total cost of paying and filing eight months late is $2,898, a penalty of almost 29%.

Note that simply filing an extension by April 15th reduces the failure-to-file penalty from $2250 to $900 and reduces the total penalty and interest by half from $2,890 to $1,443.

In summary, if you owe tax but cannot pay by April 15th, make sure you do the following:

  • Most importantly, file your tax return by April 15th, or file an extension and file by October 15th! Doing so will allow you to avoid the 5% per month (25% maximum) failure-to-file penalty. Some mistakenly believe they will be worse off by filing without making a payment, but that is generally not the case.
  • Once the failure-to-file penalty is avoided, any outstanding payments will be charged a 0.5% per month failure-to-pay penalty, plus an interest charge, which is currently 3% annualized. That brings the current cost of not paying taxes on time to about 0.75% per month or 9% annualized. To avoid this charge, pay as much as you can as soon as you are able.

Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.