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IRS Penalties for failure to file on time and Payment of Federal Taxes in 2020

IRS Penalties for failure to file on time and Payment of Federal Taxes in 2020

April 15 is normally U.S. Tax Day, which is when personal income tax returns are due with the IRS unless that day is a weekend or statutory holiday. When this is the case, the due date becomes the next business day. You should also request an extension of this date if you need more time to prepare for your return. An extension gives you an added six months, as the IRS charges fines and interest if you are filing late or paying taxes.


Penalty for Late Payment

The failure to file on time or late payment applies to any portion of federal tax debt unpaid on the due date. This is usually the filing date, April 15 in most years. 

The Internal Revenue Service imposes a penalty of 0.5% for each month or part of the month in which the tax is not paid, up to a total of 25% of the total due.


Penalty for failure to file on time

The penalty for failure to file on time is higher. As a standard penalty, this is a percentage of any portion of the tax due that has not been paid by the date of filing the claim. The penalty is a rate for each month or part of a month in which your return is not filed on time.

The time starts counting until the tax deadline, which would normally be April 15, if you don't request an extension for that date. You will have until October 15 for this sanction to take effect if you request an extension.

The fine accumulates until you file your return. You will pay at least $ 435 or a penalty equal to 100% of the tax due, whichever is less if you do not file within 60 days of the due date.

However, there is an exception to the late filing penalty if you file a return because you are entitled to a refund or don't owe taxes. Then, there is no penalty in this case.


IRS Quarterly Interest Rates

Interest accrues daily and is generally added to any unpaid tax from the payment time until the tax is paid. The IRS sets rates every three months at the federal short-term rate plus three percentage points.

On June 4, 2020, the IRS reduced its interest rate by two percentage points for the 3rd quarter of this year. The interest rate is 3% on tax balances owed to the IRS. That's less than 5% in the first two quarters of the year.  

The appropriate quarterly interest rate is charged for each quarter, so taxpayers will continue to pay a higher percentage of their balance for the first and second quarters of 2020. The decision for the third quarter is not retroactive.

The Internal Revenue Service will also pay 3% interest on late refund, although this is rare because the IRS has an "administrative time" of around 45 days if you file the return on the due date to process it and issue a refund.


The reason behind the change in the Rate

The IRS code requires the IRS to review its interest rate quarterly to monitor the economy. This does not mean that the rate always changes quarterly. That won't change unless there are major changes in the national economy, but that won't be the case this year with the recession that began in February and the coronavirus pandemic.

The IRS interest rate is the federal short-term rate plus three percentage points, rounded to the nearest percentage point in simpler terms. This puts the short-term rate for the third quarter of 2020 at around 0%. 


Penalties if you neither file nor pay

The total fine limit is 47.5% of the tax due (22.5% for failure to file on time and 25% for late payment) if you miss the tax day and don't request an extension from the IRS to file your tax return in October and if you owe anything on the return.

The non-payment penalty will continue to increase up to 25% even after the non-payment penalty has reached its maximum.


Request an extension

You must file a request immediately for an extension of time to file the return if you know the return is likely to be delayed. Submit Form 4868 to the IRS, but it will not be accepted if the primary filing deadline has passed. You don't have to wait until the next tax day to file your return if it is possible to do so before that date.

You can also request an extension even if you have completed your return and appear to be paying taxes. This at least extends the filing deadline and helps you avoid the harsher penalty for a late submission.

Calculate how much you think you owe when you request an extension and pay when you submit the form.

An extension gives you time to meet a tax professional to ensure you don't lose a deduction, credit, or other details that might be of help.

Tax deductions reduce your taxable income and can push you into a lower tax bracket, which will lower your tax bill. In contrast, a tax credit comes directly from what you owe the IRS and can sometimes put you in a difficult position to receive a refund instead of paying.


Waving the penalty

The IRS can provide administrative assistance and waive penalties if you qualify under its First Time Penalty Abatement policy. You must not have incurred any penalties in the past three fiscal years to be eligible. You must also have completed and filed for the current year on time and paid or agreed to pay the taxes due.

The IRS may waive the late payment penalty if you show a reasonable and justified reason for the delay in payment. You may be provided with administrative assistance even if you have received misleading advice from the Internal Revenue Service, but this is more difficult to prove and claim.


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