When does the IRS charge interest/penalties and how are the amounts calculated?
Info below taken from www.IRS.gov as of 9/2018
The IRS charges interest on late or unpaid taxes during the period beginning with the original due date of the return and ending with the date of payment receipt by the IRS.
The interest rate charged is equal to the Fed Funds Rate plus 3%. Interest is compounded daily.
As of 9/2018, the Fed Funds Rate was equal to 2%, making the IRS interest charges equal to 5% (2% Fed Funds Rate + 3%).
The IRS also reserves the right to charge penalties on top of the above interest amounts. See below for a detail of different penalty types and the corresponding penalty calculations.
Failure to file - When you don't file your tax return by the return due date, generally April 15, or the extended due date if an extension to file is requested and approved.
- 5% of unpaid tax , charged each month (or part of a month) the return is late, up to 5 months
- Applies for a full month, even if the return is filed less than 30 days late
- Reduced by the “failure to pay” penalty amount for any month where both penalties apply
- Income tax returns are subject to a minimum late filing penalty when filed more than 60 days after the return due date, including extensions. The minimum penalty is the LESSER of two amounts – 100% of the tax required to be shown on the return that you didn’t pay on time, or a specific dollar amount that is adjusted annually for inflation. The specific dollar amounts are:
- $210 for returns due after 1/1/2018
- $205 for returns due between 1/1/2016 and 12/31/2017
- $135 for returns due between 1/1/2009 and 12/31/2015
- $100 for returns due before 1/1/2009
Failure to pay - When you don't pay the taxes reported on your return in full by the due date, generally April 15. An extension to file doesn't extend the time to pay.
- 0.5% of tax not paid by due date, generally April 15; 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy
- Recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25% is reached
- Full monthly charge applies, even if the tax is paid before the month ends.
Failure to pay proper estimated tax - When you don’t pay enough taxes due for the year by the way of withholdings, or your quarterly estimated tax payments, when required.
- You can avoid this penalty if you either owe less than $1,000 in tax after subtracting withholding and refundable credits, or if you pay in at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
- Estimated payments, if needed, should generally be made in four equal installments, in order to avoid penalty. but amounts can be varied if income was earned unevenly throughout the year.
- The penalty is calculated separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.
Dishonored payment - When your bank doesn't honor your check or other form of payment.
- For payments of $1,250 or more, the penalty is 2% of the amount of the payment.
- For payments less than $1,250, the penalty is the amount of the payment or $25, whichever is less.
You may qualify for relief from some penalties, if you tried to comply with the requirements of the law, but weren't able to meet your tax obligations. See penalty relief for more information from the IRS website.
Click here for info on what to do if you receive an IRS notice.