The combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of the month your return was late, up to 25%. The IRS may also choose to remit your outstanding tax payment to a private collection agency, which is likely to be much more aggressive in recovering the funds. Penalty reduction is the process of eliminating penalties for taxpayers who made a mistake or faced extenuating circumstances. This gives you an additional six months to file your taxes, which gives you more time to get everything in order and delays some of the penalties for not filing your return that you might face otherwise.
Fortunately, if the tax agency files an SFR and evaluates the taxes, you won't have to pay the amount it says you owe. If you haven't paid your taxes in years, the IRS may try to recover those funds in several ways. Penalties and interest on unpaid taxes can be substantial, so ignoring your tax reporting obligations is never a good idea. If you can't pay the full amount of your taxes or penalties on time, pay what you can now and request a payment plan.
Not having the money to pay your tax bill isn't a reason to avoid filing a return, and it won't help you avoid penalties. However, if April 18 passes before you make your tax payments, a couple of different things can happen, depending on your taxpayer status. Having the IRS file a tax return on your behalf may seem convenient, but you'll likely owe a lot more taxes than you would have if you filed a return yourself. Penalties for filing late taxes are deliberately set high enough to encourage taxpayers to file them in a timely manner.
However, if a payment is not made, the government can request the full amount and cancel the installment plan. Most employers withhold money from each paycheck, which goes to your taxes, but those withholds don't usually take into account the refunds and credits you may be entitled to, so the government has to return the money to you in the form of a tax refund. For the first month, instead of imposing a 5% penalty for not filing the return plus a 0.5% penalty for non-payment, the IRS would apply a 4.5% penalty for late filing plus a 0.5% non-payment penalty, for a combined total of 5%. The IRS allows taxpayers a filing extension until May 15, and all individual taxpayers can use Free File to request it.
Paying the taxes due generates less money for the government to charge interest, making the penalty for not paying less severe.
