As if you needed another reason to file your taxes on time and avoid penalties, the IRS announced that interest rates are increasing for the quarter that began April 1, 2018. The interest raise has more implications than just more money owed for overdue payments and underpayments; we unpack the details below.
The numbers are small but the tax owed can come at a big loss if you let bills pile up. Underpayments and overpayments for individuals will now be 5% annually (daily compounding). The rate will be 4% for corporations, and 2.5% for the portion of corporate overpayment exceeding $10,000. Interest rates on taxes will increase to 7% for large corporate underpayments.
The interest rate will be added to penalties and fees you already owe for paying or filing past the deadline, which can really add up, as mentioned below.
It depends on if you pay your taxes late, file late, or both.
The penalty for paying your taxes late is 0.5% of balance due per month or partial month, with a maximum of 25%. Failure to pay is much more costly; a 5% penalty will be added to the amount you owe for each month or partial month after the deadline to file.
It’s worth noting that if you commit both tax blunders, you will pay 5%, not 5% plus the 0.5%. Also, the percentage of interest is based on the money you owe; therefore, if you don’t owe the IRS any money in taxes, you will not be penalized for filing late. However, the IRS will be holding your refund until you do file.
Thinking of filing for an extension? This might help you in the sense that you have more time to gather your documents and assess your circumstances, but an extension to file is not an extension to pay; this means you can still have to pay the increased interest even if you extend.
In real terms, if you owe the IRS a few thousand dollars in taxes, and you’re 2 or 3 months late on payment, you will accrue about $200 in interest, on top of the taxes you owe. That might not be astronomical, but increasing your tax bill is never financially beneficial.
As the IRS raises the stakes for failing to file or pay, it becomes more important to get on top of your taxes as soon as possible. We recommend you consult a tax professional to guide you through the process. The last thing you want to do is end up with a larger tax bill than Uncle Sam requires!
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