What Happens If You File Late Taxes?
Navigate the complexities of overdue tax returns. Understand potential costs and proactive steps to manage your situation effectively.
Taxpayers must file their tax returns by the designated deadline each year. Failing to meet this obligation can result in financial repercussions. Understanding these consequences is important for managing personal finances.
Understanding Failure to File Penalties
A penalty is assessed when a tax return is not filed by its due date, including extensions. This penalty is 5% of unpaid taxes for each month or part of a month the return is late, up to a maximum of 25%. If no tax is owed, such as when a taxpayer is due a refund, there is no failure-to-file penalty.
For returns filed more than 60 days late, a minimum penalty applies. This minimum is the lesser of $510 for 2025 tax returns, or 100% of the tax owed. Unpaid tax for penalty purposes considers the total tax shown on the return, reduced by timely payments like withholding or estimated taxes, and any refundable credits.
Understanding Failure to Pay Penalties
A separate penalty is imposed for failing to pay taxes owed by the due date, even if the tax return was filed on time. This penalty is 0.5% of unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%.
Both penalties can apply simultaneously. When this occurs, the failure to file penalty is reduced by the failure to pay penalty. For instance, a 5% failure to file penalty would be 4.5% with a 0.5% failure to pay penalty, totaling 5% for that month. While the failure to file penalty maxes out after five months, the failure to pay penalty can accrue until the tax is fully paid, up to its 25% maximum.
Understanding Interest on Underpayments
Interest is charged on any unpaid tax from the original due date until paid in full. This interest also applies to assessed penalties. The IRS sets these interest rates quarterly, typically the federal short-term rate plus three percentage points.
Interest compounds daily. Unlike penalties, interest cannot be abated based on reasonable cause. Abatement is only considered when interest accrual is due to an unreasonable error or delay by the IRS in performing a ministerial or managerial act.
Steps to Take After Filing Late
If you filed your tax return late or were unable to pay on time, take immediate action to mitigate further consequences. File your return as soon as possible, even if you cannot pay the full amount. Submitting the return will stop the accrual of failure-to-file penalties.
Paying as much of the tax liability as you can afford will reduce both penalties and interest charges. If you cannot pay the full amount immediately, various payment options are available.
A short-term payment plan allows up to 180 additional days to pay the balance in full, without a setup fee. An installment agreement allows monthly payments over up to 72 months, or six years.
The IRS will send notices regarding any penalties and interest assessed. These notices detail the amounts owed and provide instructions. For taxpayers with significant financial difficulty, an Offer in Compromise (OIC) allows settling tax debt for a lower amount. Eligibility for an OIC depends on ability to pay, income, expenses, asset equity, and requires all required tax returns to be filed.