It seems like the Internal Revenue Service (IRS) loves punishing taxpayers with penalties and interest. Income Tax penalties began as a way to encourage prompt payment for income taxes owed to the IRS. These IRS penalties are 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.
2. 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 income tax penalties are calculated a bit differently. Although both IRS penalties 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.
As an 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. If in the same situation 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 income tax liability.
Unlike income tax penalties, interest continues to accrue until it is paid in full. If the IRS penalty abatement is granted the calculation for interest is adjusted accordingly.
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