In the United States, the gap between taxes owed and taxes paid is $600 billion. The US Department of Treasury estimates that the top 1% are responsible for 30% of this deficit.
The remaining 70% come from a variety of sources. This includes individuals and businesses that pay their taxes late or do not pay enough. These events may trigger the IRS underpayment penalty rate.
If you can’t pay your taxes in full this year, you may be subject to interest fees. These fees can start to add up. Plus, those willfully evading their tax payments may be subject to liens on their assets or even criminal charges.
Want to avoid these potential complications of not paying or underpaying your taxes? If so, this guide is for you. Keep reading to learn the current IRS penalty rates and how you can avoid further consequences for underpayment.
What Is the Underpayment Penalty?
The underpayment penalty is a fee the IRS imposes on individuals and businesses that can’t pay their taxes. If this happens to you, you will receive Form 2210 from the IRS in the mail.
The form will state how much you underpaid and how much you owe. It will also list the penalties for failing to pay.
What Is the IRS Underpayment Penalty Rate?
The IRS underpayment penalty rate varies depending on your income level. Individuals making an AGI of $150,000 per year or less must pay the lesser of the following:
- 90% of the current year’s taxes
- 100% of the previous year’s taxes
Individuals who bring in an AGI greater than $150,000 must pay the lesser of 90% of the current year’s taxes or 110% of the previous year’s taxes.
What Is the IRS Failure to File Penalty Rate?
Failing to pay your taxes altogether will start incurring fines on the day after taxes are due. Filing 1–5 days late will incur a 2% fee, filing 6–15 days late will incur a 5% fee, and filing 16+ days late will incur a 10% fee.
What Is the IRS Underpayment Interest Rate?
In 2023, the IRS underpayment interest rate is 7% per year. That is 7% of the total amount due. So, if you owe $1,000 in taxes, you will pay $70 in interest for each year you fail to pay.
IRS interest rates only apply once you receive a notice of underpayment. As long as you pay within the stated deadline, you can avoid these fees.
Underpayment interest rates have increased steadily over the last year. In the first quarter of 2022, the penalty rate was only 3%. Underpayment tax penalties have not been as high as they are today since the last financial crisis.
In 2008, the IRS levied a 7% penalty fee. However, that was 1% less than the penalty fee charged in 2007, which was 8%. The highest IRS underpayment interest rate in the last few decades was in 2001, when it hit 9%.
The underpayment rate changes on a quarterly basis. Since it is trending upward right now, you may want to consider taking care of back payments now.
What Are the Consequences of Not Paying?
The consequences of not paying or underpaying your taxes include fees and interest. Those who the IRS believes are willfully evading their tax payments may also be subject to liens and even criminal charges.
Underpayment Penalty Fees Will Pile Up
Penalty and interest fees can greatly increase the longer you wait to pay your taxes. Even if you can’t pay, it is better to communicate with the IRS about your situation. There are options for people who can’t pay (more in a moment).
The IRS Can Put a Lien on Your Assets
A lien is a legal claim against the property you own. It means the IRS can seize your assets to recover the money you owe in back taxes.
Keep in mind that the IRS reserves this penalty for payers they believe are willfully avoiding tax payments. As long as you communicate with the IRS about your situation, you can avoid this risk.
The IRS Can File Criminal Charges
Tax evasion is a third-degree felony in the US. People found in violation of this law are eligible for up to 10 years in prison and up to $10,000 in fines. The more you owe, the higher the penalties for not paying.
How to Avoid Underpayment Penalties
The best way to avoid these penalties is to pay your taxes on time and in full each year. The only way the IRS may excuse an underpayment or failure to pay and waive the penalty fee is if:
- You did not owe taxes for the previous year
- You missed your payments due to a natural disaster or another unusual situation
- You retired during the previous year
- You became disabled during the previous year
- You changed your filing status during the previous year
These are the rules for individual taxpayers. Employers, especially those of large corporations, may have to follow different rules. And the IRS tends to be less lenient towards businesses than individuals.
Are you an employer searching for advice on catching up with back payroll taxes? The article at this link can help you understand your options to avoid the consequences of failing to pay.
Looking for More Tax Advice?
The IRS underpayment penalty rate is not the only consequence to worry about if you fail to pay your taxes or pay less than what you owe. You may also be subject to interest fees, asset seizure, or criminal charges.
Are you looking for more advice for filing your taxes on time and in full? If so, keep scrolling for additional articles just like this one.