The Real Cost of Paying Late

Today is the deadline for paying individual income taxes. While you can get an extension to file your income tax return you cannot get an extension to pay your tax. If you don't pay the total amount due you will be charged penalties and interest on the shortfall. It's never good to have your IRS record reflect that you paid penalties, but sometimes it can't be avoided. Unexpected changes in your tax situation or last minute cash shortfalls happen. However, many times the inability to pay is due to poor planning or budgeting. In these cases liabilities can go outstanding for several months and the addition to your tax bill can be substantial. So what does it cost to pay late? Here is how IRS calculates the amount of penalties and interest.

If you are underpaid on April 15th IRS charges interest on the unpaid liability. The rate of interest is currently at 7% and goes up and down with the market. IRS adjusts the rate each quarter. Also, interest is calculated daily so filing the return even one day later than the date your CPA has used to calculate interest owed could result in a tax notice from IRS.

IRS also charges a penalty of .5% per month for paying late up to a maximum of 25%. This .5% per month penalty equates to a 6% annual rate so the total cost of not paying your tax when due is equal to a 13% annual rate (7% interest + 6% penalty). That's not low, but it gets worse. IRS calculates interest using the compound method which works great if you're on the receiving end but not so good if you're the one having to pay up. Additionally, IRS charges interest on the amount of the penalty as well. So the effective rate you pay on your unpaid tax liability is somewhere north of 13%.

A bigger penalty is reserved for those who fail to file a tax return. That penalty is 5% of the tax due for each month the return is late, up to a maximum of 25%. You will also pay interest on this unpaid amount as well. For this reason it is imperative that you file an extension if you can't file your tax return by the due date. On the flip side if you owe nothing and don't file your tax return on time you will not pay a penalty for late filing.

Joey Brannon is the founder of Axiom Professional Group, a tax, consulting and accounting firm in Bradenton, Florida. Mr. Brannon is both a CPA and an EA. You can find out more about Axiom by visiting www.axiomcpa.com.