IRS Penalties and Interest
It seems like the Internal Revenue Service loves punishing taxpayers with penalties and interest. Tax penalties began as a way to encourage prompt payment for taxes owed to the government. They’re added so often now that the extra charges have become a primary money-maker for the Internal Revenue Service. According to the Internal Revenue Service Data Book, 2014 $25.5 billion dollars of civil penalties were assessed.
What is abatement? IRS penalty abatement is defined as removal of certain penalties assessed by the IRS.
Two common penalties that can meet criteria for possible abatement are:
- Failure-to-File: “A failure to file penalty may apply if you did not file by the tax filing deadline”. (IRS Tax Tip 2013-58, April 18, 2013)
- Failure-to-Pay: “A failure to pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline”. . (IRS Tax Tip 2013-58, April 18, 2013)
Each of these penalties are calculated a bit differently. Although both are capped at a maximum of 25% of your unpaid tax. The Failure-to-File penalty is generally 5% of your unpaid tax for each month the return is late. The Failure-to-pay penalty is generally .5% of the unpaid tax for each month it is late. The IRS will assess penalties for partial months.
For example: If you owed $100,00.00 on your individual income tax return and filed an extension, but paid the total when the extension is due on October 15, your penalty would be approximately $3,000.However, if in the same circumstance you do not file an extension, your failure-to-file penalty may be capped, resulting in a much higher total IRS liability.
Interest generally accrues on unpaid tax in addition to penalties until the debt is paid in full. According to IRS.gov, topic 653, “The interest rate is determined quarterly and is the federal short-term rate plus 3%”, and is compounded daily. The complexity of the calculation can cause taxpayers to owes thousands of dollars in addition to the original tax liability.
Unlike tax penalties, interest continues to accrue until it is paid in full. If penalty abatement is granted the calculation for interest is adjusted accordingly.
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