What are these Penalties and Interest that the IRS is adding to my bill?
Monday, May 4th, 2009The first question some clients ask is “What are these penalties and interest on my IRS bill? That is a good question; let’s take a look.
Most of the clients that come to me either have income tax returns that have not been filed or they filed them after the due date of the return. Returns that are filed after the due date are assessed a late filing penalty, if tax is owed on the return. This is simply a penalty for filing a return late. The penalty is 5% for any part of a month, even one day, when a return is filed after the due date. It doesn’t matter if the return is one-day late or 30 days late, the penalty is 5% of the tax owed. The penalty continues to accrue for each month or part of a month late until it is 5 months late. The late filing penalty stops after it reaches 25%.
There is also a penalty for paying the tax after the due date, not including extensions. If your return is due on April 15th and you mail it in but do not send in the taxes due or get an extension but do not send in the taxes due, you will owe a late payment penalty starting on April 16th. The late payment penalty is 6% per year. This penalty stops after 50 months, because the late payment penalty stops after it reaches 25%.
On top of these two penalties the IRS also charges interest. The interest varies over time. Presently the interest is at the rate of 4%. This interest is compounded daily. I am often asked, “If I get an installment agreement will the penalty and interest stop?” The simple answer is no! If you have a car loan or a mortgage on your home, you know interest accrues each month.
If you have an unfilled return and there is a refund, there is no penalty or interest due. The penalty and interest are a percentage of the tax owed; so if no tax is owed, no tax is due.
In some situations, taxpayers can get the IRS to remove the penalties and interest. I will discuss requesting abatement of the penalty and interest in another post.
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