Tax Lawyer's Blog

The IRS imposes stiff penalties for a taxpayer’s failure to file and pay on time. In addition to the penalties, the IRS will assess interest on the balance owed.

Here is IRS Topic 653:

If you file on time but don’t pay all amounts due on time, you’ll generally have to pay a late payment penalty of one–half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is applied.

The one–half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy.

For individuals who file by the return due date, the one-half of one percent rate decreases to one-quarter percent for any month in which an installment agreement is in effect.

If you owe tax and don’t file on time, the total late-filing penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $100 or 100 percent of the tax owed.

If both the penalty for late filing and the penalty for late payment are imposed in any month, the late-filing penalty will be reduced by the amount charged for late payment. Thus, the maximum amount of the combined penalties is 47.5%.

Example

Moe the Drummer owes $10,000 in taxes.

He files his tax return six months late, on October 15, 2009 and pays the tax nine months late, on January 15, 2010.

In addition to interest charges on the late payment, Moe will be assessed late filing and late payment penalties determined as follows:

The Late Payment Penalty = $450

Moe will be assessed a penalty equal to a 1/2 % of the unpaid tax per month up to a maximum of 25%.

The late filing penalty is calculated using the formula:

(A x C) x B

Where,

• A = 1/2 %
• B = Amount of unpaid tax
• C = Number of months tax was unpaid

Applying the formula we arrive at a late filing penalty of $450.00 as follows:

(.5% x 9) x 10,000 = 450

The Late Filing Penalty = $2,200

The late payment penalty formula is:

(D x F) x E

Where,

• D = 5%
• E = Amount of unpaid tax
• F = Number of months return is late

Using this formula we get the following:

(5% x 6) x 10,000 = 3,000

This results in a penalty of 30% of the underpayment.

However, because this exceeds the maxumum penalty allowed (5 months @ 5%), Moe will be assessed the maximum late filing penalty of 25% of the unpaid tax, or $2,500.

Reduction for Imposition of Combined Penalty

Because both penalties were imposed on Moe for 5 (the maximum period) of the 6 months April 15th through October 15th, the late filing penalty will be reduced by the amount of the late payment penalty imposed in those 5 months (i.e. 5/9ths of 450 = 250):

$2,500 – $ 250 = $2,250

Total Penalties = $2,700

By filing 6 months late and paying the tax 9 months late, Moe the Drummer has increased his tax bill by a whopping 27%.

And this is before the calculation of interest on the underpayment.

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