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Penalties and interest will dramatically increase what you owe the IRS or state taxing authorities. The longer you wait to file and pay, the more overwhelming the situation can become. To start, we’ll need to collect some basic information below.
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The purpose of this tool is to illustrate the way in which penalty and interest can significantly increase a liability. The result should not be misconstrued as a payoff to the IRS or state taxing authorities. This tool assumes that the return was not filed within five months of the due date (including extensions), that no payments were made after filing, and that any required deposits were not made timely.
IRS Penalty and Interest Calculator
If you’re in a situation where you’ll need to pay your taxes late, you’re likely wondering how much will the IRS charge on interest, and how much will the IRS charge for penalties.
The exact amount you will pay depends on multiple factors.
The three biggest factors that will determine how much you owe are:
- Whether or not you filed your tax return on time
- How much you still owe
- The current IRS interest rate
Table of Contents
- How is IRS Interest Calculated?
- Why Does the IRS Charge Penalties
- How do you know if You Owe a Penalty to the IRS?
- Does the IRS Charge Interest on Penalties?
- Types of IRS Penalties
- Does the IRS Ever Forgive Penalties
- How Do You Dispute an IRS Penalty?
- What is IRS First Time Penalty Abatement?
- What Happens if You Miss a Year of Filing Taxes?
How is IRS Interest Calculated?
Between interest and penalties, the interest is easier to calculate. The IRS interest rate is determined by the Federal short-term rate plus 3% for most individuals.
The federal short-term rate as of Jan 2022 is .44%. The federal “short-term rate” is determined from a one-month average of the market yields from marketable obligations of the United States with maturities of three years or less.
As of January 1, 2022, The Internal Revenue Service announced that the interest rates will remain the same for the first quarter. The rates are:
- 3% for overpayments (two (2) percent in the case of a corporation)
- 0.5% for the portion of a corporate overpayment exceeding $10,000
- 3% for underpayments
- 5% for large corporate underpayments
Keep in mind that interest rates are predicted to start increasing in 2022, so these numbers can and likely will change. Interest is computed on a daily basis, so each day you are late paying your taxes, you’ll owe more on the balance.
So, if you owe the IRS $10,000 and you’re 90 days late your total interest charges would come out to around $75.
Why Does the IRS Charge Penalties?
If not having enough to cover your tax liability isn’t stressful enough, the IRS shows little mercy when it comes to penalties. The dollar amount of your penalty depends on the type of penalty and the time it takes to pay it back. The IRS states that the purpose of penalties is to encourage voluntary compliance.
How do you Know if You Owe a Penalty to the IRS?
When the IRS charges you a penalty, they’ll send you a notice or letter by mail. The notice or letter will tell you what the penalty is, the reason you’ve been charged, and what to do next.
Each notice will include an identification number. If you’re able to resolve your issue, in some cases the penalty may not apply.
Does the IRS Charge Interest on Penalties?
The IRS does charge interest on penalties. The date they begin to charge interest varies by the penalty type and amount. Interest increases will gradually increase the amount you owe until your balance is paid in full.
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Types of IRS Penalties
There are a number of different types of IRS penalties you can be charged for. The more you understand what types of penalties exist, the better you can navigate them when faced with one, or avoid them altogether.
The IRS charges penalties for numerous reasons, the most common being if you don’t:
- File your tax return on time
- Pay any tax you owe on time and in the right way
- Prepare an accurate return
- Provide accurate information
IRS Failure to File Penalty
The Failure to File Penalty applies if you don’t file your tax return by the due date. The penalty is a percentage of the taxes you didn’t pay on time.
The penalty is calculated based on how late you file your tax return and the amount of unpaid tax as of the original due date.
Your unpaid tax is the total tax required to be shown on your return minus amounts paid through withholding, estimated tax payments, and allowed refundable credits.
The Failure to File Penalty is calculated in the following way:
- 5% of the unpaid taxes for each month or part of a month that your tax return is late. The penalty will not exceed 25% of the total unpaid taxes.
- If a Failure to Pay Penalty is also accessed, the Failure to Pay Penalty is reduced by the amount of the Failure to Pay Penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.
- After 5 months of nonpayment the Failure to File Penalty will max out, but the failure to pay penalty continues until the tax is paid, up to its max of 25% of the unpaid tax as of the due date.
- If your return is over 60 days late, the minimum Failure to File Penalty is $435 or 100% of the tax required to be shown on the return, whichever is less.
IRS Failure to Pay Penalty
The Failure to Pay Penalty applies to taxpayers who don’t pay the tax reported on their tax return by the due date or approved extended due date. The accessed penalty is a percentage of the taxes that were not paid.
The IRS calculates the Failure to Pay Penalty based on how long the overdue taxes remain unpaid. Unpaid tax is the total tax required to be shown on a return minus amounts paid through withholding, estimated tax payments, and allowed refundable credits.
The Failure to Pay Penalty will not exceed 25% of the total unpaid tax amount. The Failure to Pay Penalty is calculated the following way:
- The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month the tax balance remains unpaid. The penalty won’t exceed 25% of the taxpayer’s unpaid taxes.
- If both a Failure to Pay and a Failure to File Penalty are applied in the same month, the Failure to File Penalty will be reduced by the amount of the Failure to Pay Penalty applied in that month. For example, instead of a 5% Failure to File Penalty for the month, the IRS would apply a 4.5% Failure to File Penalty and a 0.5% Failure to Pay Penalty.
- If you filed your tax return on time as an individual and you have an approved payment plan, the Failure to Pay Penalty is reduced to 0.25% per month (or partial month) during your approved payment plan.
- If you fail to pay your tax in 10 days after getting a notice from the IRS with an intent to levy, the Failure to Pay Penalty is 1% per month or partial month.
- The IRS applies full monthly charges, even if you pay your tax in full before the month ends.
IRS Accuracy-Related Penalty
An Accuracy-Related Penalty applies if you underpay the tax required to be shown on your return. Underpayments can happen when you don’t report all of your income or you claim deductions or credits which you don’t qualify for.
The IRS applies two types of Accuracy-Related Penalties to individuals:
- Negligence for Disregard of the Rules or Regulations
- Substantial Understatement of Income Tax
The IRS applies negligence when they determine you haven’t made a reasonable attempt to follow the tax laws when preparing your tax returns. Disregard means you carelessly, recklessly, or intentionally ignore the tax rules or regulations.
Examples of negligence include:
- Not keeping records to prove you qualify for the credits or deductions you claimed
- Not including income on your tax return that was shown in an information return, like income reported on a Form 1099
- Not checking the accuracy of a deduction or credit that seems inflated
A substantial underestimate of tax applies if you understate your tax liability by 10% of the tax required to be shown on your tax return or $5,000, whichever is greater.
IRS Underpayment of Estimated Tax Penalty
The Underpayment of Estimated Tax by Individuals Penalty applies if you don’t pay enough estimated tax on your income or you pay it late. The penalty may apply even if you’re owed a refund.
The IRS calculates the amount of the penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits.
The IRS calculates the penalty based on the following:
- The amount of the underpayment
- The period when the underpayment was due and underpaid
- The interest rate for underpayments that the IRS publishes quarterly
IRS Failure to Deposit Penalty
The Failure to Deposit Penalty applies to employers that don’t make employment tax deposits on time, in the right amount, and/or in the right way.
Employer-paid taxes include federal income tax, Social Security and Medicare taxes, and Federal Unemployment Tax. The penalty is a percentage of the taxes not deposited on time, in the right amount, or right way.
The IRS calculates the amount of the Failure to Deposit Penalty based on the number of calendar days your deposit is late, starting from the due date.
For example, if your deposit is more than 15 calendar days late, the IRS doesn’t add a 10% penalty to the earlier 2% and 5% late penalties. Instead, your new total penalty would be 10%.
|Number of Days Your Deposit is Late||Amount of the Penalty|
|1-5 calendar days||2% of your unpaid deposit|
|6-15 calendar days||5% of your unpaid deposit|
|More than 15 calendar days||10% of your unpaid deposit|
|More than 10 calendar days after the date of your first notice or letter (for example, CP220 Notice) or The day you get a notice or letter for immediate payment (for example, CP504J Notice)||15% of your unpaid deposit|
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IRS Information Return Penalty
An information return penalty can be accessed if you don’t file information returns or provide payee statements on time. The IRS charges penalties for each information return you fail to correctly file on time and each payee statement you fail to provide.
The maximum penalties are different for small and large businesses. There is no maximum penalty for intentional disregard.
|Tax year||Up to 30 days late||31 days late through august 1||After august 1 or not filed||Intentional disregard|
Does the IRS Ever Forgive Penalties?
The IRS can remove or reduce some penalties if you acted in “good faith” and can show reasonable cause for why you weren’t able to meet your tax obligations. By law, the IRS cannot remove or reduce interest unless the penalty is removed or reduced.
The IRS determines reasonable cause after examining all the facts and circumstances in your situation. They say they will “consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.”
The IRS will consider any of the following to be sound reasons for failing to file a tax return:
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so
- Note: A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the failure-to-pay penalty.
Facts the IRS will request to establish reasonable cause:
- What happened and when?
- What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file and/or pay your taxes on time?
- How did the facts and circumstances affect your ability to file and/or pay your taxes or perform your other day-to-day responsibilities?
- Once the facts and circumstances changed, what actions did you take to file and/or pay your taxes?
- In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?
Common documents the IRS will request to establish reasonable cause:
- Hospital or court records or a letter from a physician to establish illness or incapacitation, with specific start and end dates
- Documentation of natural disasters or other events that prevented compliance
How Do You Dispute an IRS Penalty?
If you disagree with the amount the IRS says you owe, you have the option to dispute the penalty. You can attempt calling the IRS or write a letter stating why the IRS should reconsider the penalty. Sign and send your letter along with any supporting documents to the IRS address on your notice or letter.
The following information should be in the letter or at hand if you call:
- The notice or letter the IRS sent
- The penalty you want them to reconsider
- For each penalty, an explanation of why you think it should be removed
What is IRS First Time Penalty Abatement?
The first-time penalty abatement (FTA) waiver is an administrative waiver that the IRS may grant to relieve taxpayers from failure to file, failure to pay, and failure to deposit penalties if certain criteria are met.
The policy behind the procedure is to reward taxpayers for having a clean compliance history and the idea that everyone is entitled to one honest mistake.
FTA does not apply to other types of penalties such as the accuracy-related penalty or underpayment of the estimated tax penalty.
To qualify for first time penalty abatement you must meet the following criteria:
- Filing compliance: You must have filed (or filed a valid extension for) all required returns and can’t have an outstanding request for a return from the IRS.
- Payment compliance: You must have paid or arranged to pay all tax due (can be in an installment agreement if the payments are current).
- Clean penalty history: You must have no prior penalties (except a possible estimated tax penalty) for the preceding three years.
What Happens if I Miss a Year of Filing Taxes?
Some people go years without filing their tax returns. After they miss on tax year, they get nervous about the unknown consequences, and instead of correcting the situation let it snowball.
The best solution is to get caught up and don’t let it happen again. No matter how bad your situation, ignoring it will only make it worse.
When considering what’s at stake every time you choose not to file keep these three facts in mind:
The law requires you to file every year that you have a filing requirement. The government can hit you with civil and even criminal penalties for failing to file your return.
You will be penalized:
The late filing penalty is 5% of the tax owed per month for the first five months – up to 25% of your tax bill. The IRS keeps charging interest until you pay off the balance. Late payment penalties add up over time, so it’s always best to file even if you can’t pay your taxes owed.
You can lose your refund:
If you were due a refund, you may lose the refund depending on how late you file. To get your refund, you have to file the return within three years of the due date.
If you missed one year or several years of filing your taxes don’t let late filing penalties scare you. A tax professional can help evaluate your situation, show you what to expect, and make a plan to help you get back on track as quickly and painlessly as possible.
Whether you need help with employment taxes or individual taxes working with a tax resolution expert can save you money, penalties, and interest, and get you back on track to where you want to be faster than you think.
Tax resolution agents are experts at settlements, and working with one can potentially save you a lot of money, and even save your home or property. The longer you wait the more you put your home, business, bank accounts, and other assets at risk. Timely professional assistance can make a world of difference. 20/20 Tax Resolution are nationwide licensed tax professionals. 20/20 Tax Resolution has helped over 32,000 businesses and individuals reach successful resolutions with their IRS and state tax liabilities.