How Much Do You Pay in Fees and Interest on Unpaid Tax Debts?

How Much Do You Pay in Fees and Interest on Unpaid Tax Debts?

• May 29, 2023

When it comes to taxes, the general rule of thumb is to pay on time to avoid interest and fees. However, sometimes unforeseen and unavoidable circumstances may leave you unable to pay your taxes on time. In such a situation, it's important to understand how much you might end up paying in fees and interest on unpaid tax debt. Keep reading to learn more about the various fees and interest rates you might incur if you don't pay your taxes on time.

Interest on Unpaid Taxes

The interest rate charged on unpaid taxes changes every quarter, but it's typically calculated as the federal short-term rate plus three percentage points. For the first quarter of 2023, the interest rate is 6% per annum, which is divided into daily rates. It's essential to note that interest compounds daily, which means you'll be charged interest on the unpaid balance every day until you pay the tax in full.

Penalties for Late Payment

If you don't pay your taxes on time, you'll incur a late payment penalty of 0.5% of the unpaid tax per month, or part of a month, up to a maximum of 25% of the unpaid tax. This penalty starts accruing on the day after the tax due date and continues until you pay the tax in full.

Penalties for Late Filing

If you fail to file your tax return on time, in addition to failing to pay the debt on time, you'll incur a late filing penalty of 5% of the unpaid tax per month, or part of a month, up to a maximum of 25% of the unpaid tax. This penalty starts accruing on the day after the tax due date and continues until you file your tax return. If you file your tax return more than 60 days after the due date, the minimum penalty is either $435 or 100% of the unpaid tax, whichever is less.

Combined Penalties for Late Filing and Late Payment

If you don't file your tax return and pay your taxes on time, you'll be charged both the late payment penalty and the late filing penalty simultaneously. The maximum combined penalty is 5% per month, or part of a month, up to a maximum of 47.5% of the unpaid tax. The late payment penalty is reduced by the late filing penalty for any month where both penalties apply.

IRS Payment Plans

If you're unable to pay your taxes in full, the IRS offers payment plans to help you pay your tax debt over time. The payment plan is called an installment agreement, and it allows you to make monthly payments until you pay the tax in full. The IRS will charge you interest on the unpaid balance, but the late payment penalty will be reduced to 0.25% per month as long as you're on the installment agreement.

Offer in Compromise

If you're unable to pay your tax debt in full, even over an extended period of time, you might qualify for an offer in compromise. An offer in compromise is a settlement agreement between you and the IRS, where the IRS agrees to accept less than the full amount owed to settle the tax debt. To qualify for an offer in compromise, you must demonstrate that you're unable to pay the full amount owed or that paying the full amount would cause significant financial hardship. The IRS will consider your ability to pay, income, expenses, and asset equity when determining if you qualify for an offer in compromise.

Fees when You’re on a Payment Plan

It’s important to note that qualifying for and receiving an IRS payment plan does not erase the fees associated with late payment. Regardless of any debt relief program you may qualify for, your tax debt will continue to accrue fees and interest on a daily basis (though it may be reduced, as described above). This is why it’s important for you to continue to pay as much as you can towards your debt as quickly as possible, so you can reduce the amount you pay in fees and interest.

Contact the IRS Advocates

If you're struggling with unpaid tax debt, the best thing you can do is contact the IRS Advocates. We are a team of professionals dedicated to helping taxpayers resolve their tax issues quickly and efficiently. We can help you understand your options for resolving your tax debt, including payment plans and offers in compromise, as well as other protections provided by the IRS. The IRS Advocates can also help you navigate the complex IRS bureaucracy and communicate with the IRS on your behalf. Contact us today to schedule a consultation with one of our advocates, and start getting your tax debt back under control as soon as possible.