Late Filing: Interest and Penalties May Apply

June 3, 2014

With April 15 behind us, most taxpayers have filed their income tax returns. If for some reason, people have yet to file their 2013 return, they may owe interest and penalties when the return is ultimately filed.

It is important to note that interest and penalties are charged only if taxes are owed. If the return shows a refund, no interest or penalties apply, even if the return is filed late.

Here are eight points you should know about interest and late penalties:

1. The IRS checks all returns for mathematical accuracy. If the IRS finds you owe more money, it will send you a bill.

2. Interest is generally charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest is compounded daily. Currently, the interest rate is 3 percent because the federal short-term interest rate is 0 percent.

3. In addition to interest, if you file a return but do not pay the entire amount due on time, you will generally have to pay a late payment penalty of one-half of one percent for each month, or part of a month, up to a maximum of 25 percent, on the amount of tax that remains unpaid.

4. If you owe tax and do not file your return on time, a separate failure-to-file penalty is usually 5 percent of the tax owed for each month, or part of a month, that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100 percent of the tax owed.

5. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it is 10 times more, so those who cannot pay what they owe by the due date should still file their tax return on time, or file for an extension, and pay as much as they can.

6. The maximum penalty for failure to file and for failure to pay is 25 percent of the amount of tax owed, so the combined maximum is 50 percent of the tax owed.

7. The penalties for filing and paying late may be abated if you have reasonable cause and the failure was not due to willful neglect. Generally, interest charges are not abated. They continue to accrue until all assessed tax, penalties and interest are paid in full.

8. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.