The amount of a tax debt increases over time. The reason for this is IRS penalties and interest. Every month, the IRS charges penalties and interest on back taxes.
For failure to pay taxes on time, the IRS charges a penalty of 0.5%. This penalty is charged each month or part of the month that the taxes remain unpaid. Interest is charged at the federal short-term rate plus 3% for a year, which is compounded daily.
An important factor to consider is that filing a tax return is different from paying taxes. If you file your return, but do not pay your entire tax bill, the IRS will charge penalties and interest on the balance. Remember, it is important to file a return even if you cannot pay the taxes due. If you pay more than 90% of your taxes, then you may avoid the penalty for late payment.
Even if you filed for an extension, you are still required to pay your entire tax bill before the due date. An extension is only an extension to file, not to pay. Therefore, to avoid penalties and interest, you need to pay your taxes by the due date.
If you fail to file your tax return on time, the penalty is 5%. This penalty is also charged every month until the tax return is filed. It can reach but cannot exceed 25%.
The IRS begins to charge penalties and interest for failure-to-file starting from the due date of the return. For example, if the tax-filing deadline is April 15, the IRS will begin charging penalties and interest beginning on April 16.
If you cannot file your return on time, you should file for an extension to avoid the penalty. If for any month, both the failure-to-file and failure-to-pay penalties apply, the maximum combined penalty that you will pay will be 25%.
If there was a reasonable cause such as a critical illness, a natural disaster, theft, etc. that prevented you from filing your tax return on time, you may be able to have the penalty forgiven. Otherwise, it is advisable to file and pay your taxes on time to avoid additional charges.