Each year, from January to mid-April, people across Texas prepare to file their annual taxes. However, for many reasons, not everyone can get their tax return mailed or filed before April 15th. Fortunately, the IRS allows late payers and filers to qualify for extensions. However, extensions also come with penalties.
Late filing penalties
The IRS charges a failure-to-file penalty if you e-file or mail your federal tax return after April 15th. This late filing penalty is 5% of your unpaid taxes for each month that passes. If you take three months to file your taxes, you’d have a 15% penalty. The IRS won’t let this penalty exceed 25%.
Penalties for making late payments
A failure-to-pay penalty is a tax law allowing the IRS to charge late payers 0.5% of their taxes owed for each month no payment comes through. The IRS limits further penalty rate increases for late payers at 25% of their unpaid taxes. If you face failure-to-file and failure-to-pay penalties in the same month, your total penalty will be 5%. In these situations, the IRS penalizes you with a late filing penalty of 4.5% and a late payment penalty of 0.5%.
The IRS charges an interest rate that’s the federal rate on short-term interest plus 3%. If the current short-term interest rate is 1.5%, the IRS adds its 3% for a total of 4.5%. Interest rates can change every few months. Your tax penalties become more expensive if the short-term interest rate increases.
It can feel understandably overwhelming knowing you owe the IRS money. Fortunately, many options are available to ease the financial burden of large tax bills.