The last thing taxpayers want to do is to pay the Internal Revenue Service (IRS) more money than they have to.

But filing tax returns late could lead to higher payments. The financial consequences will be more severe this year than last year.

According to Fox Business, IRS interest rates will increase for the calendar quarter beginning on April 1.

“The rate will climb to 4% for overpayments and 3% for corporations, 1.5% for the portion of a corporate payment exceeding $10,000, 4% for underpayments and 6% for corporate underpayments,” Fox Business reported. “For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate, plus 3 percentage points.”

Compounding Interest

Especially for those who are flirting with the tax day deadline of April 18, keep in mind that taxpayers owe interest on any unpaid tax from the due date of the return until the payment date. Furthermore, interest is compounded on a daily basis.

According to CNN Business, “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.”

CNN Business also wrote that “even a relatively small balance owed can balloon quickly.”

For example, if one owes the IRS $1,000 but doesn't file their return or pay the money for six months past the original due date, that bill could tack on at least another $600.

“Regardless of when you file your tax return, if you do not pay the tax you owe by the tax filing deadline, the IRS penalties can be severe. The IRS will charge you one-half percent each month on the amount of tax you still owe after the deadline,” TurboTax writes. “If you fail to file a return altogether by the extension date, the IRS penalty increases to 5 percent per month, for a maximum penalty of 25 percent.”

Filing an Extension

One option taxpayers have is to file an extension, but that doesn’t mean what they owe to the IRS is put on hold.

“IRS does grant you an automatic extension to file your taxes every year, as long as you complete Form 4868,” TurboTax says. “Common reasons for requesting an extension include a lack of organization, unanticipated events or tax planning purposes. Even if you obtain an extension to file, you must still pay your income tax in full by the tax deadline.”

A worst-case scenario is if one doesn’t file their taxes at all and pay what they owe. For this, they’ll be subjected to both the failure-to-file fee and the late payment penalty.

Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.

Image: Reuters.