Why You Might Have to Pay a Tax Penalty

Tobie Stanger
Updated

Consumer Reports has no financial relationship with advertisers on this site.

Consumer Reports has no financial relationship with advertisers on this site.

What's the harm in filing your taxes late? It depends on whether you owe Uncle Sam or Uncle Sam owes you.

If the IRS owes you a refund, you face no repercussions aside from losing the opportunity to invest or spend that money while it's still in the government's hands. In this case, you actually have until Tax Day 2021 to file your 2018 tax return. Wait longer and you forfeit your refund to the U.S. Treasury. The IRS says taxpayers leave $1.4 billion on the table this way.

What if you owe the government money? The IRS can charge you penalties and interest on the amount you owe.

With Monday, April 15, the deadline for filing your 2018 federal and state income tax returns, here’s what you need to know, depending on your circumstances.

If You Owe and Don't File Your Return by the IRS Tax Deadline

In this instance, the IRS will charge you a “failure to file” penalty that grows every month that you don’t file your return. The tax penalty is typically 5 percent of the amount you owe. After one month, if you still haven’t filed, it rises by another 5 percent—to 10 percent—of the original amount owed. This could continue until your total tax penalty rises to 25 percent.

If after 60 days you still haven’t filed, an IRS rule may kick in that charges you a minimum penalty of $205 or 100 percent of what you owe, whichever is less. This may not apply, however, depending on how much you owe the IRS. The IRS lets you know whether you will be charged the 60-day penalty or whether you’ll continue to be subject to the 5 percent growing penalty.

"You should always at least file your tax return by the due date," says Tim Steffen, a CPA, financial planner, and director of advanced planning for Baird Private Wealth Management based in Milwaukee. "The IRS is more understanding of someone who at least makes an effort to get right with them rather than someone who ignores their filing responsibility."

If You File Your Return on Time But Don't Pay in Full

You’re in a better position than if you don't file on time. You’ll have to pay a tax penalty of one-half of 1 percent for every month that you’re late, much lower than the penalty for filing late. Like the “failure to file” penalty, the late-payment penalty grows every month.

So if you pay one-half of 1 percent in the first month you’re late, the total penalty will rise to 1 percent in the second month and 1.5 percent in the third month. This will continue until the tax penalty reaches a cap of 25 percent of the amount you owe, which can take more than four years.

But you’re also liable for interest on what you owe. That interest is based on the federal short-term rate and changes every quarter. It fluctuates but currently is annualized to 6 percent; it's calculated daily, beginning on April 15.

Figuring out how much you’ll owe in penalties is complicated. A calculator can help you estimate what your penalties will be.

Mitigating Factors

One way to lower your tax penalty is to sign up for the IRS installment agreement. You can do this if you file on time but can't pay all the taxes you owe. You'll generally have to pay a fee to start a plan; it ranges from $31 to $149, depending on the type of plan you select.

Tom Wheelwright, a CPA and chief executive of WealthAbility, a wealth management company based in Tempe, Ariz., says that selecting an installment agreement is a great idea if you can't pay everything now. "The IRS will almost always grant a taxpayer an installment plan," he says.

Under an installment agreement or plan, you get a break. Your late-payment penalty is cut in half, to one-quarter percent. But you're not off the hook from paying it or any interest that accrues. "The penalties and interest keep going until the balance—including the penalties and interest—is paid off," Wheelwright says.

There some instances when the IRS will excuse you if you are late to file or pay:

  • If you are active-duty military working abroad or the victim of a federally declared disaster, you can submit a detailed explanation and backup documentation to the IRS explaining your situation. The IRS will review it and let you know whether you are exempt from paying penalties. For instance, residents of certain counties in Nebraska affected by winter storms, straight-line winds, and flooding that took place on March 9 have until July 31 to file individual income tax returns. They also have that long to establish or contribute to IRAs for tax-year 2018, and to pay quarterly estimated taxes that would be due on June 15. 

  • If you were affected by a disaster that was not federally declared and are still unable to file or pay all your taxes, the IRS may still waive penalties and give you an extension. Call the IRS at 800-829-1040 to request penalty abatement. 

  • If you or someone in your family were seriously ill and couldn’t meet the tax deadline, the IRS may consider that reasonable cause for being late. If you get a penalty notice, respond explaining your situation.

  • U.S. citizens and resident aliens who both live and work abroad have until June 15 to file a completed tax return. They will, however, have to pay interest on the amount due for the period between April 15 and June 15. 



More from Consumer Reports:
Top pick tires for 2016
Best used cars for $25,000 and less
7 best mattresses for couples

Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2019, Consumer Reports, Inc.