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Two deadline-related tax penalties: Which is more serious?

It’s April and the tax filing deadline is less than two weeks away. If you have not yet filed or had a chance to think about taxes, you still have options.

Take a realistic assessment of the new week and a half. If your calendar is so busy the odds of filing on time are virtually nonexistent, submit Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Tax Return) and the IRS will automatically grant you a six-month extension. This can help you avoid the late-filing penalty (spoiler alert - it is the stiffer penalty).

What are the two penalties?

The late-filing penalty applies if you do not file your tax return by the April 17, 2019 deadline. Taxpayers in Massachusetts get an extra two days, because of the state Patriots' Day holiday and the federal Emancipation holiday.

The second is a late-payment penalty. This one applies when you cannot pay your tax bill in full by the deadline.

The more costly = late-filing penalty

File late and the IRS assesses a 5 percent penalty per month or part of a month you are late. The maximum goes up to 25 percent. If you owed $10,000 and did not file by the deadline, a $500 penalty tacks on the first month and it goes up from there.

The late-payment penalty is minor in comparison at .5 percent of the tax balance (it also caps out at 25 percent after many months). If you enter a payment plan with the IRS, they will cut this penalty in half to .25 percent.

Combined these penalties top out at 5 percent per month up to 25 percent. Added on top of the two penalties, the IRS charges interest (6 percent continues into the second quarter of the year).

Between penalties and interest, a tax debt can quickly skyrocket. It can also trigger the service to use various collection tools from tax liens to passport denial (it's newest).

Payment options

The IRS suggests taking a loan or making a payment on a credit card. Depending on your unique financial circumstances these might be viable options. When they are not, you can request an installment agreement from the IRS. If you owe less than $50,000, you can usually apply online for a payment plan (up to 72 months).

If tax problems have been getting worse each year, now is the time to speak with a tax attorney about a solution. Individualized advice and counsel can be priceless and lift the dread of a IRS lien, levy or wage garnishment.

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