Failure to File, Failure to Pay

• The penalty for failure to file a federal income tax return is 4.5 percent of the amount due per month or part of a month that you are late, capped at 22.5 percent of the amount you owe. The penalty for failure to pay your taxes is 0.5 percent per month or part of a month that you fail to pay, capped at 25 percent of the amount you owe. If your return is filed at least 60 days late, however, a minimum fine will apply -- the lesser of $135 or 100 percent of the amount you owe. If you fail to respond to several notifications, the IRS may raise your failure-to-pay penalty to 1 percent per month.
  
  

Interest

• The IRS will also assess interest against your unpaid taxes. As of the time of publication, the rate was equal to the federal short-term interest rate plus 3 percent. Interest is simple, not compound, but is not capped the way penalties are. It is often cheaper to borrow money to pay your taxes than allow your debt to accumulate interest at the IRS rate.
  
  

Other Penalties

• If your tax delinquency arose because you under-reported your tax due, you may be liable for additional fines. If you underestimated your taxes by at least $5,000 or 20 percent of the amount due, the IRS may consider you negligent and fine you 20 percent of the overdue amount. If it considers your return to be frivolous -- if, for example, it doesn't contain enough information to calculate your taxes, the IRS could fine you $500. The IRS has the power to place a lien against all your property to secure your tax debt, and to auction your property.
  
  

Options

• You may seek an installment payment plan from the IRS by filing Form 9465. If you owe more than $25,000, you will also have to file Form 433-C and allow the IRS to examine your finances. Penalties will continue to accumulate, but the IRS will not take collection action as long as your payments are current. You can also discharge some tax debts in bankruptcy. If the IRS places a lien against your property, you are entitled to a hearing. In some cases, you may appeal an adverse decision to the federal tax court.