Back Taxes Penalties: How to Avoid or Minimize Extra Fees

July 15, 2020

If you haven’t been able to pay your taxes by this year’s deadline (July 15th), then you might be wondering about what back taxes penalties may apply to you. Geaux Tax Resolution of Lafayette, LA has all the information you need. We’ll explain what the penalties are and show you the best ways to minimize them without getting into more trouble with the IRS.

How Back Taxes Occur

Back taxes are taxes owed past the due date. The due date for payment is always the same as the date for filing, which was extended multiple times in 2020 until July 15th. When you have back taxes, fees and interest penalties start to accrue immediately.

Back taxes can happen for a number of reasons. The most common, of course, is failing to pay by the deadline. However, it can also happen because you miscalculate your tax owed and pay less than the total amount. Additionally, some people may not realize they owe the IRS money from a previous year or due to filing late, and then they underpay. Regardless of the case, here are the back taxes penalties you need to know about.

What Back Taxes Penalties Are There?

There are two basic types of penalties. One is for failing to file by the deadline, and the other is for failing to pay by the deadline. There are also failure to pay penalties for estimated tax payments, which apply to self-employed individuals. You can find all the official information from the IRS website.

Filing Penalties

The base penalty for failing to file is 5% of the total tax owed. This is charged every month on the first day of the month, so even if you are one day late, you owe the IRS 5% extra.

If you go more than 2 months (60 days) past the filing deadline, then an automatic penalty of the lesser of 100% of the tax or $435 applies immediately, on top of whatever you owed before.

Let’s use an example of $1,000 owed for the sake of easy math. If you failed to file on time, you now owe $1,050. If you go more than two months without filing, you now owe $1,535: $435 from the minimum late fee and another $100 for two months at 5% of the unpaid tax. As you can see, it adds up quickly.

Failure to Pay Penalties

Failing to pay your taxes also incurs a penalty. This is only 0.5% of the tax not paid. Like failure to file, these fees are assessed at the start of every month, even if you pay it all the very next day. This goes up to 1% every month if the IRS sends you an intent to levy notice and you do not pay within 10 days.

Fortunately, this penalty is actually deducted from the failure to file penalty if the two apply in the same month. Another good thing is that there is an upper limit of 25% of the total tax owed, however that would take at least a couple of years to accumulate, which means you likely owe tax on other years too. It’s a problem that can spiral out of control.

Note that this penalty is charged on both the tax you reported to owe and the tax the IRS determines you owe. So, if the IRS claims you owe them more than you thought, you’re still paying these back taxes penalties.  

Estimated Tax Penalties

If you are self-employed, then you are expected to file and pay quarterly estimated taxes. Generally, you file a W-4 with the employer, and they will withhold a portion of your earnings to help you avoid a surprise payment later. There is a $500 penalty for telling your employer not to withhold if you do not have a valid justification for doing so.

If you expect to owe more than $1,000 in taxes during the year, then you need to make those quarterly payments. Failure to do so can lead to interest penalties like the ones we described above.

How to Minimize Back Taxes Penalties

Now that you know what the penalties are for back taxes and how quickly you can rack up a nasty bill, what can you do to reduce back taxes penalties or eliminate them completely?

Besides the obvious answer of paying on time, there are some things you can do to minimize the damage.

Reducing Filing Penalties

The simplest way to reduce filing penalties is to file as soon as possible. There really is no excuse for filing late. The deadline is always communicated well in advance, and if you expect your taxes to be complicated, get started early. But, if for some reason you weren’t able to file on time, there are some things you can do.

Filing for an Extension

By filing for an extension, you can avoid the 5% failure to file penalty for two months. However, be aware that your extension is only valid for two months, and after that, the minimum late penalty of $435 or 100% of your tax owed can apply immediately.

The IRS generally accepts most requests for an extension. There are some cases where it will be granted without question such as if you are currently overseas.

Minimizing Failure to Pay Penalties

An extension does not exempt you from failure to pay penalties. That means that even if you get an extension for two months, those first two months will accrue the 0.5% interest penalty on your total tax due.

If your tax burden is significant, you don’t see any way to make the full payment in time, and you want to reduce the penalties against you, there are options.

Creating an Installment Plan

You can ask the IRS for a short-term or long-term installment plan. There is a fee for the long-term installment plan, which is any plan that goes past 120 days. You can request this online and set up minimum monthly payments.

The benefit of an installment plan is that it reduces your failure to pay penalties in half, down to 0.25% per month. On a large tax bill, this can save you a lot of money. The IRS generally accepts these offers, but be mindful that breaking your agreement can lead to more fees and a return to higher interest rates.

Another benefit of an installment plan is that it won’t negatively affect your credit and the IRS won’t put out liens on your property or income.

Asking for an Offer in Compromise

An offer in compromise is the last resort for people who owe the IRS more than they could possibly pay. You will need to prove that your income is insufficient. You will then negotiate the total amount you have to pay and determine a schedule for payment. If the IRS feels that you can afford your tax due, then you will be given an installment plan.

Stay Out of Trouble

Don’t let your tax situation get out of hand. Back taxes can quickly spiral out of control, so before that happens get in touch with the tax masters at Geaux Tax Resolution of Lafayette, Louisiana. We’ll do everything we can to minimize your tax burden and prevent penalties. Don’t wait until it’s too late, call us now.