If you owe taxes to the IRS, the first thing you need to know is that borrowing money to full pay your tax debt may have a lower interest rate than allowing IRS penalties and interest to accumulate. Even paying with a credit card might save you money, especially when your Collection Statute Expiration Date (the amount of time that the IRS has to collect the debt) has many years remaining.
The IRS charges interest and penalties on top of the tax portion of a liability. Interest is typically not a subject for abatement, and accrues from the day when a tax return was due until the Collection Statute Expiration Date, or until the tax debt is full paid. The interest rate is subject to change, and can be found on the IRS website. Generally, this is the Federal Short Term Rate plus 3%.
IRS penalties are another method the government can use to ensure compliance. There are different types of penalties, which include a penalty for submitting a frivolous return, a failure to deposit penalty, a failure to file penalty, a failure to pay penalty, combined failure to file and failure to pay penalties, etc.
The penalty for submitting a frivolous return is $5,000. It may be charged when a taxpayer files a frivolous tax return or made other submissions that were considered frivolous.
For a business, a failure to deposit penalty is charged when, for example, a taxpayer did not make federal tax deposits on the 941 withholding tax return, or failed to make estimated tax payments. Estimated tax payments are usually required to be paid quarterly. In order to determine your schedule for withholding federal tax deposits, you need to review IRS Notice 931, Deposit Requirements for Employment Taxes. This will enable you to determine your deposit schedule based on the established look back period.
A failure to file penalty is a penalty that can be assessed if you did not file your tax return on time, but had a balance due for that unfiled return. This penalty can be from 0.5% to 25% of the tax owed, depending on how long ago the return had to be filed. If the return was filed over 60 days after it was due, the minimum failure to file penalty is the lesser of $100 or 100% of the tax due.
A failure to pay penalty accrues if a taxpayer did not pay federal tax liability on time. If you are an individual taxpayer, it is important to understand that an extension to file a return does not also extend the time to pay. In other words, if you cannot file your return on time and applied for an extension, you still need to do your best to estimate the amount of the tax due on this return and make a timely payment to avoid a failure to pay penalty.
A late payment penalty is ½% of the unpaid amount of the liability for each month that the tax remains unpaid, but not greater than 25%. This rate changes to 1% if the IRS issued a Notice of Intent to Levy, and the tax is still unpaid ten days after the notice has been issued.
Even if the IRS accepts a proposal that allows for the delinquent tax to be paid on an Installment Agreement, penalties and interest continue to accumulate, although it will accrue at a rate of ¼% instead of the previous ½%.