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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.

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IRS Income Tax Penalties and Interest

By Martel Pellerin

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.

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Original Issue Discount (OID)

By Martel Pellerin

Original Issue Discount refers to the excess of an obligation’s stated redemption price at maturity over its issue price, and it is taxable as interest over the life of the obligation on a year-by-year basis. It is effectively interest income. Those debt instruments that may have OID include zero coupon bonds, debentures, notes, certificates, or other evidence of indebtedness having a term of more than one year.

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Imputed Interest using the Applicable Federal Rates (AFRs)

By Martel Pellerin

In 1984, the Tax Reform Act set provisions for applicable federal rates (AFRs). This is a minimum tax rate that must be charged on all loans, including personal loans. The IRS provides various prescribed rates for federal income tax purposes each month and TimeValue Software offers them on our website at Applicable Federal Rates | TimeValue Software.

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Calculating Imputed Interest for Related Party Loans

By Martel Pellerin

There is a federal mandate for a business to charge interest on loans to or from its owners or for other related party loans. Sec. 7872 was enacted as part of the Tax Act of 1984. This Code section required loans between certain related parties, usually in excess of $10,000, to bear a minimum amount of interest based on the applicable federal rates (AFRs). With short-term rates well under 1%, the resulting amounts of self-charged interest can seem negligible but should be done.

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