Individual Income Tax Return Penalties & Interest
The IRS imposes various penalties on taxpayers for different reasons. Many taxpayers believe that by filing an extension in April, they are protected from all interest and penalties until October. That is untrue. The IRS provides some guidance in Topic 653.
Generally, April 15 is the deadline for most people to file their individual income tax returns and pay any tax owed. During its processing, the IRS checks your tax return for mathematical accuracy. When processing is complete, if you owe any tax, penalty, or interest, you will receive a bill.
Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily. Visit Newsroom Search for the current quarterly interest rate on underpayments.
In addition, if you file a return but don't pay all tax owed on time, you'll generally have to pay a late payment penalty. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month. See Topic No. 202 for information about payment options.
If you owe tax and don't file on time, there's also a penalty for not filing on time. The failure-to-file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $450 (for tax returns required to be filed in 2023) or 100 percent of the tax owed. See Topic No. 304 for information about extensions of time to file if you can't file on time.
You must file your return and pay your tax by the unextended due date to avoid all interest and penalty charges.
As you can see, these penalties can add up. The ONLY penalty above affected by an extension of time to file is failure-to-file penalty. It is also the MOST punitive penalty. In order to avoid ALL listed penalties above and interest, 100% of the tax must be paid by the original due date. An extension without paying the balance due when filing the extension in April is not sufficient to prevent all penalties and/or interest.
NOTE: This is not an exhaustive list of penalties. It is only an analysis of the two most common penalties.