What happens if you don't file a tax return or pay taxes that you owe by their due date? Generally, in this situation the IRS will send you a notice hitting you with interest and penalties.
Interest. The IRS will charge you interest on taxes not paid by their due date, even if you've been granted an extension of time to file your return. Since July of 1994, the interest rates have fluctuated between 8 percent and 10 percent.
Interest is also charged on the penalties imposed for failure to file a return as well as other penalties imposed for negligence, fraud, etc. This interest is charged on the penalty from the due date of the return, including extensions.
Penalties. If you pay your taxes late, the penalty is usually 0.5 percent of the unpaid amount for each month or part of a month the tax is not paid. The penalty can't be more than 25 percent of the unpaid amount and applies to any unpaid tax on the return. Please note, this penalty is in addition to the interest charged for late payments.
The IRS will also hit you with a penalty if you file your return late. If you don't file your return by its due date (including extensions), the penalty is usually 5 percent of the amount due for each month or part of a month your return is late, unless you have a reasonable explanation. If you think you have a reasonable explanation, write it down in a statement and attach it to your return, and you might be able to avoid the penalty. In any case, the penalty usually can't be more than 25 percent of the tax due. However, if your return is more than 60 days late, the minimum penalty will be $100 or the amount of any tax you owe, whichever is smaller.
Generally, corporations are subject to the same rules as individuals. However, corporations are also subject to penalties if they don't deposit taxes or deposit them after the due date. Deposits of tax after the due date are subject to a penalty on the underpayment. The underpayment is the excess of the required tax deposit over the tax deposited by the due date.
Estimated tax penalty. What happens if you underpay your estimated tax? You may have to pay a penalty in the form of interest on the underpayment for the period when the underpayment occurred. The penalty is figured separately for each payment period, and you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment.
As a matter of fact, if you didn't pay enough tax by the due date of each of the payment periods, you may owe a penalty even if you are due a refund from the IRS when you file your income tax return.
You can request a waiver of the penalty if the underpayment was caused by a casualty, disaster, or some other unusual circumstance that would make its imposition unfair. The IRS may also waive the penalty for reasonable cause during the first two years after a taxpayer retires upon reaching age 62 or becomes disabled. Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, must be filed to request a waiver.
You can use Form 2210 to calculate your estimated tax penalty. But this form is very complicated, and generally, you aren't required to complete it. When you file your tax return, the IRS will usually figure the penalty for you and send you a bill. Depending on what you pay your tax pro, it may be more beneficial to you to let the IRS do the calculations. What other situations might require you to file Form 2210? Other than when you request a waiver, you must file Form 2210 when:
Corporations must use Form 2220, Underpayment of Estimated Tax For Corporations, to determine any underpayment of the corporation's estimated tax. Corporations generally don't have to file Form 2220 - the IRS will figure any penalty and bill the corporation. However, corporations must file Form 2220 if: