IRS Penalties for Late Filing and Payment of Federal Taxes in 2020
The penalties can get steep if you neither file nor pay
April 15 is usually Tax Day in the U.S., the date by which individual tax returns must be submitted to the IRS unless that day falls on a weekend or holiday. In this case, the due date becomes the next business day. You must also file for an extension by this date if you need more time to prepare your return. An extension gives you an additional six months to file.
The IRS charges penalties and interest if you're late filing your taxes or making your payment.
Tax Day has been pushed back to July 15 in 2020, so you have an additional three months to complete your 2019 taxes, which normally would be due on April 15, 2020.
The Penalty for Late Payments
The late payment or failure-to-pay penalty applies to any portion of your federal tax debt that remains outstanding as of the due date. This is typically the filing date, April 15 in most years. For 2020, this date is July 15.
The IRS imposes a failure-to-pay penalty of 0.5% for each month or part of a month that the tax goes unpaid, up to a total of 25% of the total you owe.
The Penalty for Late Filing
The penalty for filing late is steeper. Like the failure-to-pay penalty, it's a percentage of any portion of your tax due that remains unpaid as of the filing date. The penalty is a percentage for each month or part of a month that your return is late.
The clock begins ticking at your tax deadline, which would normally be April 15 unless you filed for an extension by that date. You'd have until October 15 before this particular penalty kicks in if you asked for an extension.
The penalty accrues until you file your return. The longer you wait, the worse it gets. You'll pay at least $435 or a penalty equal to 100% of the tax you owe, whichever is less, if you fail to file within 60 days of the due date.
This penalty used to be $330, but it was increased $435 under the terms of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in 2019.
An exception exists to the late-filing penalty if you're filing a return because you're due a refund—you don't owe any tax. There's no penalty in this case.
IRS Quarterly Interest Rates
Interest compounds daily and is typically added to any unpaid tax from the time the payment was due until the date the tax is paid. The rates are set by the IRS every three months at the federal short-term rate plus 3 percentage points.
On June 4, 2020, the IRS cut its interest rate by 2 percentage points for the third quarter of 2020. For the third quarter of 2020, the interest rate is 3% on tax balances due to the IRS. This is down from 5% during the first two quarters of the year.
The applicable quarterly interest rate is charged for each quarter, so taxpayers will still pay a higher percentage on first and second quarter 2020 balances. The third quarter ruling isn’t retroactive.
The IRS will also pay 3% interest on late refunds, although this rarely happens because the IRS has “administrative time” of about 45 days if you file on or after the due date to process your return and issue a refund.
Why the Rate Changed
The Internal Revenue Code requires that the IRS review its interest rate quarterly in order to keep pace with the economy. This doesn’t mean that the rate always changes quarterly. It won’t change if there hasn’t been a big swing in the national economy, but that’s not the case in 2020 with the recession that began in February and the coronavirus pandemic.
In simplest terms, the IRS interest rate is the federal short-term rate plus 3 percentage points, rounded up to the nearest percentage point. This puts the third quarter 2020 short-term rate at about 0%. Technically, it was 0.25% in May 2020, the month used in the IRS calculations.
If You Neither File nor Pay
The cap on total penalties works out to 47.5% of the tax due—22.5% for late filing and 25% for late payment—if you let Tax Day pass by and don't request an extension from the IRS to file your return in October, and if you owe anything on that return.
The failure-to-pay penalty will keep on growing up to 25% even after the failure-to-file penalty maxes out.
Request an Extension
You should immediately file a request for an extension of time to file if you know your return is probably going to be late. It's a simple matter of filing Form 4868 with the IRS, although it won't be accepted if the main filing deadline has already come and gone. You don't have to wait until October 15 to file if you happen to be able to submit your return before that time.
You might also want to file an extension even if you've completed your return and it looks like you owe taxes. This at least pushes your filing deadline back to October and helps you avoid the more serious late filing penalty.
Estimate what you think you'll owe when you request an extension, and make payment when you submit the form.
An extension gives you time to take your return to a tax professional to make sure that you're not missing a deduction, credit, or some other detail that could help you out.
Tax deductions decrease your taxable income and can push you into a lower tax bracket that will reduce your tax bill, while a tax credit comes directly off what you owe to the IRS and can sometimes put you in a situation where you'll receive a refund instead of paying.
Waving the Penalties
The IRS might provide administrative relief and waive the penalties if you qualify under its First Time Penalty Abatement policy. You must not have had any penalties in the prior three tax years to qualify. You must also have filed your current year's return on time, and paid or arranged payment for any tax you may owe.
The IRS might waive the late payment penalty if you can show that there's a reasonable and justifiable reason for the late payment. Administrative relief might also be provided if you received misleading advice from the IRS, but this is harder to prove and claim. You can reach out to the IRS by mail or by telephone.