So, what do you need to know when an individual owes taxes? Basically, paying late costs money. Interest compounds daily from the due date of the return until the balance due is paid at the rate of three percent, which isn’t too bad, but penalties also apply. There’s a failure-to-pay penalty, which can be thought of as a late payment charge. It’s at the rate of half a percent per month and accrues monthly or for any part of a month up to 25 percent. It grows to one percent after the final billing notice has been issued by the IRS.
What happens when you pay your taxes late with the IRS?
If the return has been filed timely and the tax is being paid via an installment agreement, then the failure-to-pay penalty gets reduced to a quarter of a percent per month while the installment agreement is in effect. In addition to the failureto-pay penalty, there’s the failure-to-file penalty; this is a penalty for filing late. It also accrues monthly and can grow up to 22.5 percent for returns filed over four months late. The total of these two penalties can be as high as 47.5 percent, which is definitely a consequence of filing and paying late.
Taxpayers with reasons for filing late
Taxpayers with a sound reason for filing or paying late can request abatement, and it’s based on the facts and circumstances of the case. Generally, the failure-tofile and the failure-to-pay penalties can be abated if there were unforeseen circumstances out of the taxpayer’s control causing the delinquency. We call that reasonable cause. If the Collection employees agree that there is reasonable cause, they can take action to abate the penalty. If they don’t agree, the taxpayer is advised of their rights and can appeal with the Office of Appeals.
Estimated Tax Penalty
Another costly penalty is the estimated tax penalty. I’m sure you’re all aware of how to file and pay your estimated taxes. Estimated taxes cannot be abated by reasonable cause alone. For when it can be waived, see instructions for Form 2210, Underpayment of Estimated Tax for Individuals, Estates and Trusts, or instructions for 2220, Underpayment for Estimated Tax for Corporations. Underpayment can also result in the filing of the Notice of Federal Tax Lien; see Internal Revenue Code section 6321 for more information on the underlying Federal Tax Lien, which is also known as the Statutory Tax Lien.
A lien is a claim and it attaches to real property, personal property, securities, vehicles, and future assets acquired for the duration of the lien. The lien protects the government’s interest in these assets, and the lien releases within 30 days of full payment of a liability or when the collection statute of limitations expires.
Notice of IRS Levy
The notice of levy is another consequence when a taxpayer refuses to or neglects to pay their overdue taxes. While a lien secures the government’s interest, a levy actually takes the assets to pay what is owed. A levy can attach to assets such as bank accounts, wages, commissions, rental income, and accounts receivable (to name a few). Federal payments made by the Department of Treasury Bureau of Fiscal Services can be continuously levied at the rate of 15 percent.
What payments can be levied by IRS?
These federal payments include some Social Security benefits, federal employee salaries, federal employee retirement annuities, and Medicare provider and supplier payments. The December 19, 2014, passage of the Tax Increase Prevention Act resulted in an increase to 30 percent on continuous levies for tax delinquent Medicare providers and suppliers, and levied at 100 percent are payments due to a vendor of property, goods, or services sold or leased to the federal government.
IRS automated levy programs
Other automated levy programs include the State Income Tax Levy [Program], which is a levy on individual state tax refunds, and the Municipal Tax Levy [Program], which is a levy on city taxes, as well as the Alaska Permanent Fund Dividend [Levy] Program. A levy can also be known as a seizure, which is when we confiscate an asset, usually real or personal property, and sell it to pay an overdue tax. Collection actions, such as levy and seizure, can be appealed to the Office of Appeals; see Publication 1660, Collection Appeal Rights, for details on how to appeal.