IRS Penalties and Interest
When penalties and interest are applied, a taxpayer’s assessed liability can substantially increase. After several years, it is not unusual for the penalties and interest to be more than the original tax liability, sometimes more than doubling the amount due. This is often confusing to the taxpayer, this is intended to clarify the “add-ons” the IRS uses to penalize taxpayers for not filing and paying their taxes on time.
The IRS can assess a penalty if a taxpayer does not file a tax return by its due date. Likewise, the IRS can assess a penalty if the taxpayer does not pay its taxes on time, though the penalty is less than the failure to file penalty. Then on top of that, the IRS can charge you interest on the amounts that are owed to the IRS.
Failure to File Penalty – The penalty for filing your tax return late is 5% of the unpaid taxes per month or part of the month the tax return is late. This penalty can be as much as 25% of your unpaid taxes. The minimum penalty is the lesser of $135 or 100% of the unpaid tax. If an extension is timely filed, the due date will be extended and a penalty will be assessed until the extension expires..
Failure to Pay Penalty – The penalty for not paying your taxes on time is ½ of 1% of the unpaid taxes per month or part of the month the payment is late. This penalty can be as much as 25% of your unpaid taxes. If an extension is timely filed, the due date will be extended and the taxpayer will need to have paid in 90% of their actual tax due or be faced with a failure to pay penalty.
Failure to File and Failure to Pay – If a taxpayer does not file a return on time and has a tax liability, the combined penalties for failure to file and failure to pay cannot exceed 5% in total in any given month. The failure to file penalty is reduced by the failure to pay penalty when both penalties are being assessed.
Reasonable Cause – If the taxpayer can show reasonable cause and that failure to file and failure to pay were not the result of willful neglect, the IRS can abate some of the penalties.
Interest – This is often confused with a penalty, but it is not. It is the cost of money the IRS will pass along to the taxpayer for using government money. Under section 6621(a)(2) the underpayment interest rate is the sum of the federal short term rate plus three percentage points compounded daily. This rate can change quarterly.