Often, taxpayers wait to resolve their tax debt, especially when the IRS has not initiated aggressive collection actions. Even if the IRS is not yet threatening collection efforts, taxpayers are at a disadvantage if they allow their tax debt to remain unpaid. The IRS adds penalties and interest to the debt, which can substantially increase what is owed in a short amount of time. The IRS charges these additional fees on the total amount of tax debt until it is paid in full. For failure-to-pay, the penalty begins with 0.5 percent and can reach a maximum of 25 percent. The penalties are charged each month on the total debt amount.
The interest rate charged is the federal short-term rate plus 3 percent for a year. It is compounded daily and charged on any back taxes from the due date of the return. It does not include payment extensions.
If a taxpayer does not pay taxes by the filing deadline, then the IRS begins to charge both penalties and interest on the debt. Therefore, it is beneficial to resolve the tax debt early even if the IRS does not send notices or begins collection actions. The longer a tax debt remains unpaid, the more the taxpayer will need to pay to the IRS.
Individuals that do not have the ability to pay should still file their returns on time and pay the balance later using an IRS payment plan. He or she may also qualify for a reduction plan, depending on their financial circumstances.