If you can't complete your tax return by the tax filing deadline, you should file an extension. Be aware, filing an extension does not extend the length of time you have to pay your taxes. It only extends the length of time you have to file, generally by six months. If you file an extension, be sure you have paid enough in taxes to have no tax due or a refund owed to you when you get around to filing your return.
What if you haven't filed an extension by the tax deadline?
If you miss the tax filing deadline and haven't filed an extension, you will start to accrue interest and penalties. There are penalties for both failure-to-file and failure-to-pay. If you have not paid your full tax liability by the deadline, you will be subject to both. The IRS will begin its collections process. If your taxes remain unpaid long enough, the government can put a lien on your property or levy your assets.
Interest and penalties
You may encounter two types of penalties if you miss a tax filing deadline: failure-to-file and failure-to-pay penalties.
Failure to file
A failure-to-file penalty is 5% of your unpaid taxes for each portion of a month your tax return remains outstanding. If your tax return is over 60 days late, the minimum penalty is $435 or 100% of the total tax shown on the return, whichever is less. The penalty maxes out at 25% of your unpaid taxes.
Failure to pay
Any outstanding tax you owe is generally due within 21 calendar days after the IRS sends you a letter of notice in the mail. It's due in 10 calendar days if you owe more than $100,000. If you miss this due date, you will begin to accrue a failure-to-pay penalty. The failure-to-pay penalty is 0.5% of the tax you did not pay timely for each portion of a month your tax remains outstanding. The penalty maxes out at 25% of your unpaid taxes.
If you missed filing your tax return and paying your tax liability, both failure-to-file and failure-to-pay charges apply. If both penalties apply, the total penalty each month is 5%—of which 4.5% is failure-to-file, and 0.5% is failure-to-pay. The total penalty maxes out at 47.5%—of which 22.5% is for late filing, and 25% is for late payment.
Underpayment interest
The IRS charges underpayment interest on outstanding tax and penalties. Tax is due on the due date, whether or not you file an extension. If you have not paid your full tax liability at the due date, interest will start to accrue on your outstanding amount. The failure-to-file penalty begins to accrue interest on the due date of your return, as well. The failure-to-pay penalty begins to accrue interest after the IRS notifies you via letter.
The underpayment interest rate changes quarterly. It is typically the federal short-term interest rate plus 3% for individual and corporate taxpayers. For corporate taxpayers with substantial underpayments exceeding $100,000, the interest rate is the federal short-term interest rate plus 5%.
IRS collections and enforcement actions
First, the IRS will send you a letter requesting payment for your unpaid taxes. This is when your failure-to-pay penalties start to accrue.
If you still don't pay your taxes or attempt to get on a payment plan, the IRS will issue a Notice of Federal Tax Lien. A federal tax lien alerts your creditors that the government has a legal claim against your property. The government can issue a tax lien against your real estate, personal property, or bank accounts.
After issuing a federal tax lien, the IRS will issue a levy. An IRS levy allows the legal seizure of your assets to satisfy your tax debt. For example, the IRS may garnish your wages, take money from your bank account, or seize and sell off your vehicle or real estate.
In rare cases, the IRS may even pursue criminal charges against you for tax evasion— deliberately avoiding paying your taxes.
How to get back on track
Even if you can't pay your tax liability, you should still file your tax return on time. Since the IRS assesses failure-to-file and failure-to-pay penalties separately, filing your tax return on time at least saves you on the failure-to-file. Additionally, the failure-to-file penalty maxes out faster, after only five months.
If you do not have the funds to immediately pay your tax liability, apply for an installment agreement. You may use Form 9465, Installment Agreement Request, or apply online if your total tax outstanding is less than $50,000. Applying online saves you money on the user fee compared to applying with the form. Additionally, you may qualify for a waiver or refund of the user fee if you are a low-income taxpayer.
Even with an installment agreement, your failure-to-file and failure-to-pay penalties and interest will still accrue. However, the installment agreement will prevent the IRS from taking enforced collection actions against you.
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