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If you file your Federal Tax Return after your extended deadline, you can be charged a failure-to-file penalty, which is generally ten times higher than the failure-to-pay penalty. Even if you can’t pay all the taxes you owe, filing on time is beneficial because you avoid the failure-to-file penalty. This penalty is 5% of the unpaid taxes for each month it remains unpaid; however, it will not exceed 25% of your total tax bill.
The failure-to-pay penalty is ½% of the unpaid tax each month. Failure-to-pay penalties begins to accrue the day after your taxes were due. However, if you owe both of these penalties in one month, the maximum penalty for that month will be 5%.
Remember, expats get an automatic two-month extension, and while failure-to-pay penalties will kick in after April 17, failure-to-file penalties will not be assessed until after June 15. If you show just cause as to why you didn’t pay or file your return on time, you will likely avoid these penalties.
The IRS doesn’t take kindly to those who don’t file. If your return is filed more than 60 days after the deadline (or the extension if you received one), you will pay a minimum penalty which is $135 or 100% of the taxes owed, whichever is smaller. Even if you miss the deadline, get your Federal Tax Return filed right away to avoid this hefty penalty.
The IRS charges interest daily on the amount of tax owed, penalties, and accrued interest until the balance is paid in full. Each quarter, the IRS determines the rate of interest, as of December 31, 2017 the interest rate was 4% annualized for underpayment. Interest penalties are rarely abated, reduced, or otherwise removed by the IRS. The IRS will correct interest penalty calculations if the tax account has retroactive changes; for example, if other penalties are abated or the tax liability is recalculated.
Remember, an extension of time to file your tax return is not an extension to pay the tax owed!
While expats frequently do not owe US taxes, plenty of them do! Penalties and interest stop accruing when you pay your balance in full. If you owe taxes but can’t pay the IRS in full, the best option is to pay what you can, as soon as you can. You have a couple of options if you can’t pay your entire tax bill right away:
In some situations taxpayers may request relief from penalties assessed by the IRS. Each situation must be considered on an individual basis, but you may be eligible to request abatement (reduction or removal) of penalties with a First Time Penalty Abatement or Administrative Waiver. Penalties that may be reduced include:
Other situations where the IRS may reduce penalties include reasonable cause and statutory exceptions. Speak to your accountant to find out if you should request consideration from the IRS.
The IRS will not abate interest in most situations, and interest will continue to accrue until balance is paid in full.
If you would like assistance filing US taxes abroad, our expert CPAs and IRS Enrolled Agents will help you avoid penalties and become compliant! Get started with us today!
Originally published in 2014; updated April 4, 2018.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.