Here's a breakdown of how penalties and interest accrue and how to protect yourself from that happening.
Unless you enjoy throwing money away, you'll want to do all you can to avoid being hit with tax penalties and interest if you end up owing money to the IRS on your 2021 tax return.
The failure-to-file penalty is steep: 5% of the unpaid tax you owe for each month or part of a month that your return is late. That means if you're supposed to file on April 18 but don't do so until May 5, you must pay 10% of your balance for being two months late, said Larry Gray, a CPA and managing partner of AGCCPA in Missouri.
The late payment penaltyEven if you file on time or file for an extension and avoid the failure-to-file penalty, you could be subject to a late payment penalty unless you pay off your balance in full by the original filing date. You can minimize the penalty in a couple of ways. Pay at least part of what you owe by the original filing due date. Or, if you file your return and are put on an approved payment plan with the IRS, the 0.5% per month penalty gets reduced to 0.25% of your outstanding balance, Gray noted.
Keep in mind that if you don't file your taxes or pay what you owe, you'll be hit with both the failure-to-file fee and the late payment penalty. The exception here is if you live in a federally declared disaster area in which case the IRS typically grants both an extension to file and to make tax payments.
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