IRS Penalties Explained Simply
Penalties can double your tax bill. Understanding them is the first step to getting them removed.
Failure-to-file penalty: 5% of unpaid tax per month, up to 25%. This is why filing on time (even if you can't pay) saves money.
Failure-to-pay penalty: 0.5% per month, up to 25%. Smaller than failure-to-file, but it compounds with interest.
Interest: Compounds daily at the federal short-term rate plus 3%. Currently around 7-8% annually.
A $10,000 tax debt can grow to $17,000+ in three years just from penalties and interest. That's why acting sooner is always cheaper than acting later.
Getting Penalties Removed
First-Time Abatement: if you've been clean for three years, the IRS will typically remove penalties for one year just by asking. Reasonable Cause: if circumstances beyond your control caused the problem, penalties can be abated. Most people don't know to ask for either.