Interest
Interest accrues on your unpaid balance and compounds daily from April 18 (which was the tax deadline for most people) until you pay the balance in full. Interest rates on underpayments of tax are set each quarter. For non-corporate taxpayers, the rate is equal to the federal short-term rate plus three percentage points. The current interest rate for underpayments is 7% (for the first quarter of 2023).
Late Payment Penalty
If you don’t pay the tax you owe on time, the IRS will impose a late payment penalty equal to 0.5% of the tax owed after April 18 for each month, or part of a month, and the tax remains unpaid. The penalty is capped at 25% of the amount owed. The rate jumps to 1% ten days after the IRS issues a final notice of intent to levy or seize property. However, the penalty is only 0.25% for each month, or part of a month, in which an IRS installment agreement is in effect.
You won’t have to pay the penalty if you can show “reasonable cause” for the failure to pay on time. Reasonable cause is based on all the facts and circumstances in your situation. The IRS will consider any sound reason for failing to pay your taxes on time, including:
- Fire, casualty, natural disaster, or other disturbances;
- Inability to obtain records;
- Death, serious illness, incapacitation, or unavoidable absence of you or a member of your immediate family; or
- Another reason that establishes that you used “all ordinary business care and prudence” to meet your federal tax obligations but were nevertheless unable to do so.
Simply not having the money, in and of itself, is not a reasonable cause for the failure to pay taxes on time. However, the reasons for your lack of funds may meet reasonable cause criteria for the failure-to-pay penalty.
When you finally pay, the IRS will first apply the payment to the tax you owe, then to any penalty, and then to any interest. A penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.
Failure-to-File Penalty
If you didn’t file your return by Tax Day and didn’t request an extension to file, the IRS can impose a 5% failure-to-file penalty on any unpaid taxes for each month, or part of a month, that your tax return is late. However, the penalty won’t exceed 25% of your unpaid taxes.
The late filing penalty is calculated based on the tax that remains unpaid after April 18 or, if an extension is granted, after October 16. Unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits.
If your return is over 60 days late, the minimum failure-to-file penalty is the smaller of $435 (for tax returns required to be filed in 2023) or 100% of the tax required to be shown on the return.
Double Penalties
If you still haven’t paid what you owe five months after Tax Day, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%.
If both a failure-to-file and a failure-to-pay penalty apply in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.
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