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TimeValue Software Blog

IRS Income Tax Penalties and Interest, Part 2

By Martel Pellerin

In addition to the standard Failure to File and Failure to Pay penalties, there are multiple other penalties that can be assessed by the IRS that can be easily calculated and verified using TaxInterest IRS/State interest and penalty software. TaxInterest software will allow you to determine the penalty amount and do the appropriate interest calculation. TaxInterest also handles refund interest for both individuals and corporations.

Accuracy Related Penalties – U.S. Code § 6662

Accuracy related penalties are assessed for various reasons and must be over $5,000 and can be from 20% to 40% of the related underpayment amount. Fraud (6663) is 75%.

  • Negligence 6662(c)
  • Substantial understatement of income taxes 6662(d)
  • Valuation misstatement 6662(e)
  • Overstatement of pension liabilities 6662(f)
  • Valuation understatement – estate/gift 6662(g)

All of the accuracy related penalties are interest bearing from the tax due date or extension date whichever is later.

Understatement of Estimated Tax Penalty

If you know the amount of the required installments on the installment due dates, you can compute the estimated tax penalty.

  • The estimated tax penalty is functionally an interest calculation based on the amount owed for each of the quarterly payments. The interest is calculated from the respective deposit due dates to the tax due date. The interest rate is the same as the Federal underpayment rate but the calculation methodology is simple interest versus daily compounding. This is a calculation that you can do in TaxInterest software with the 2210 or 2220 table. Here is a short video on the calculation.

The estimated tax penalty is interest bearing when the IRS assesses it with a Notice.

Overpayment Interest

Individuals and non-corporation refunds use the same rate as the underpayment rate. For corporations, the overpayment rate is the federal short-term rate plus 2 percentage points or 1 percentage point less than the underpayment rate. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. In TaxInterest software, the C-Corp Refund feature does this calculation.

In general, interest on the amount of an overpayment will start from whichever is later:

  • Tax return filing due date
  • Late filed tax return received date
  • Date IRS gets your return in a format they can process
  • Date the payment was made

The IRS stops paying interest on overpayments on the date they refund your overpayment (and interest) or offset it to an outstanding liability. Exception: They have administrative time (typically 45 days) to issue your refund without paying interest on it.

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