IRS Income Tax Penalties and Interest

The IRS standard penalties for income taxes are all a little different from each other and they are all interest bearing but they have different targets of when the interest starts which can make it challenging. The interest on Federal penalties is computed using the regular underpayment rate and is compounded daily. Interest can start from the return due date, the extension date, or the Notice/assessment date. TaxInterest software is an excellent program to do these varied calculations as all of the calculation methodology is built into each computation.

Following is a brief summary of each penalty and the associated interest for it.

Failure to File (FTF) – 6651(a)(1)

• FTF is a 5% per month or fraction of a month until the return is filed to a maximum of 25%. But like many things the IRS does, there are exceptions.
  
  • When the FTF and the Failure to Pay Amount Shown on Return (FTP) penalties run simultaneously, the Taxpayer is only responsible for the 5%, so the FTF penalty is only 4.5% and caps at 22.5%. TaxInterest handles this “offset” automatically.
  • It is important to understand that the penalty is calculated on the tax amount due on the tax date and does not adjust for any subsequent payments.
• Interest on the FTF penalty runs from the return due date or the extension date, whichever is later.
  
  • The FTF penalty is 5 months to accrue but the interest starts on the entire penalty amount from day one.

Failure to Pay Amount Shown on Return – 6651(a)(2)

• The FTP is half of one percent (0.5%) per month or fraction of a month until the tax is paid to a maximum of 25%. The percentage is calculated on the outstanding balance each month so as the tax gets paid, the penalty per month is less.
• The rate increases to 1.0% after notice of levy or jeopardy but still maxes out at 25%. The assessment triggers this increase.
• The FTP is interest bearing but the interest does not start until the IRS assesses it with a Notice. There may be multiple assessments if not paid. The interest is based on the penalty amount at the point of the assessment. In TaxInterest software, it is important that you enter the appropriate assessment dates in the FTP window to activate the interest calculation.
• The IRS offers an installment agreement that can reduce the penalty to 0.25% from 0.5% but it still caps at 25%.

Failure to Pay Amount Assessed (FTPAA) – 6651(a)(3)

This penalty applies to amounts not shown on the return but are subsequently assessed by the IRS.

• The failure to pay amount assessed penalty begins when the taxpayer receives a Notice to pay and then fails to pay.
• The FTPAA is half of one percent (0.5%) per month or fraction of a month until the tax is paid to a maximum of 25%. The percentage is calculated on the outstanding balance each month so as the tax gets paid, the penalty per month is less.
• The rate increases to 1.0% after notice of levy or jeopardy but still maxes out at 25%.
• The FTPAA is interest bearing but the interest does not start until the IRS assesses it with a Notice. There may be multiple assessments if not paid. The interest is based on the penalty amount at the point of the assessment. In TaxInterest, it is important that you put the appropriate assessment dates in the FTP window to activate the interest calculation.
• The IRS offers an installment agreement that can reduce the penalty to 0.25% from 0.5% but it still caps at 25%.

If you have any questions using TaxInterest software, please give our Support Team a call at 800-426-4741 or shoot us an email at support@TimeValue.com.