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What's the Penalty for Paying Taxes Late?

Christy Bieber, The Motley Fool

Many people are excited to submit their Form 1040 to the IRS every year because tax season tends to mean a big refund. But for millions of unlucky Americans, April 15 means sending a check to the government. 

If you owe money to the IRS, it's important to pay on time -- by April 15 (or by the next business day when that date is on a weekend or a holiday). Unfortunately, there are times when paying your tax bill on time may be challenging. If so, here is the penalty for paying taxes late, as well as some of the steps to minimize or completely avoid that penalty. 

1040 form with calculator and pen.

Image source: Getty Images.

How the penalty is calculated

If you don't pay your taxes by the April deadline, penalties could begin accruing the day after your missed payment.

The penalty for late payment equals 0.5% of the tax amount you owe for each month or part of a month you're late in paying. There is a maximum penalty of 25% of the unpaid tax amount. However, if the IRS issues a final notice of intent to levy, then your failure-to-pay penalty increases from 0.5% monthly to 1% monthly. 

In addition to the penalty for not paying on time, interest begins accruing on the day after your taxes should have been paid, and continues to accrue until your taxes are paid in full. Interest compounds daily, which means the interest charged each day is added to the principal balance, and the next day you pay interest on interest. The interest rate charged on unpaid federal tax debt is calculated quarterly and equals the federal short-term rate plus 3 percentage points. 

While paying 0.5% of the unpaid balance plus interest may seem expensive, the penalty for paying late is far less than the penalty for filing late. If you file your taxes late, you'll be penalized at 5% of the unpaid tax amount for each month or part thereof, up to a maximum of 25% of the outstanding balance due to the IRS. If you're late both filing and paying, you only pay the 5% failure-to-file penalty. 

How to reduce the penalty for paying your taxes late

Obviously, the best way to avoid the penalty for late payment is to pay your tax bill by the deadline. But even if you can't get your taxes paid in full, making a payment of part of what you owe is still better than paying nothing.

You can also avoid the penalty if you can show reasonable cause for failing to pay on time. Alternatively, you can work with the IRS on an installment agreement, which reduces the penalty rate to 0.25% for each month or part of a month that the agreement is in effect. While you have to pay a fee to set up a long-term installment agreement, there are no fees for a short-term agreement in which you pay off your tax debt within 120 days. 

You could also pay your taxes with a credit card. There's a small fee for doing so, which starts at 1.87%. The IRS has details on payment processors you can use. If you qualify for a 0% APR credit card, you may be able to get up to 12 months to pay off your tax debt interest-free -- so this may be much cheaper than failure-to-pay penalties and IRS interest costs. 

Don't pay any more in extra taxes than you have to

Paying your taxes on time avoids the added costs, including interest and penalties, and you have options to minimize those costs. If you explore them all before the April deadline, you can keep your costs down and not send more money than necessary to the IRS. 

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