There are several situations and conditions under which the Internal Revenue Service (IRS) will impose penalties and interest. These include situations in which penalties are imposed for non-payment of back taxes, late payment of taxes, unfiled tax returns, or any combination of the above. The IRS will also charge compounding interest on any unpaid tax debt.
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The most severe IRS penalties and interest will be imposed in a situation where the tax payer has completely failed to comply with the requirement of filing and paying their yearly taxes. However, as noted above, the IRS will likewise impose due penalties and interest in a situation where the tax payer has filed late, or has not paid off all of the tax debt they owe in a prompt and timely manner.
The IRS will impose a late payment penalty, which will apply to any portion of the federal tax which is unpaid at the due date (usually April 15 of every year). For each month or portion of a month that this tax debt remains unpaid, the IRS will impose a failure-to-pay penalty of 0.5% (one half of one percent). This late payment penalty cannot by law exceed 25% of the net amount of the debt due. The IRS may delay or waive this penalty altogether if the tax payer can show that there is reasonable cause for their late payment, or failure to pay.