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Do You Know What You’re Paying In Penalties?

Penalties and interest add up by the day if you haven't paid the IRS what you owe them. And they add up big-time if you haven't filed at all. Every day that you put off taking care of your IRS problem only makes it worse.

Did You File and Not Pay? If you did, there's interest being compounded daily on what you owe, which is the quarterly federal short-term tax rate, plus 3%. As of this writing, the IRS is charging 4% per year.

In addition to interest, you're also being charged a Failure-to-Pay Penalty, which is .5% of the tax owed for each month. There is no maximum for the failure-to-pay penalty. If you're sent a number of notices from the IRS and you still don't pay, the penalty increases to 1%.

What You Should Do If You Filed and Didn't Pay? The most obvious answer is to pay the debt. The IRS has more power to collect in 'mean and nasty' ways than any collection agency you'll ever deal with. So what if you just can't come up with the money? If you just don't have the money, and you cannot get it, there are legal ways to negotiate with the IRS:

Did You Not File at All? If you didn't file taxes this past year (or any other year for that matter), you have bigger problems. You still have the interest that's being compounded daily on what you owe - the quarterly federal short-term tax rate, plus 3%. As of this writing, the IRS is charging 4% per year. But the penalty gets really harsh for non-filers. You pay the .5% late payment penalty plus a 4.5% late filing penalty, for a combined penalty of 5% for the first month your return is late.

However, it gets worse: Every month that you don't file – your penalties double...until 5 months when it caps at 47.5% (22.5% late filing penalty + 25% late payment penalty). 47.5%...Ouch. That's double what even some of the worst credit cards would charge.

What You Should Do If You Haven't Filed? By all means, file your taxes...even if you can't afford to pay the tax that's due. By filing your taxes and not paying them, you'll at least go from Non-Filing to Non-Paying status. If you don't file your taxes, you won't qualify for any of these ways to pay down your debt. You'll be considered a non-filer, which is against the law and could eventually be punished with jail time if you let it go.