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How does the IRS calculate penalties and interest?

The Internal Revenue Service will assess penalties on the account for a failing to file a tax return, failing to pay tax on a return, failing to pay unreported tax, failing to remit Estimated Tax Payments (individuals) and Federal Tax Deposits (businesses), and if a payment comes back as dishonored.

The Following is a breakdown of how the penalties are calculated:

Failure to file – §6651(a)(1): penalty equates to 5% of unpaid tax and charged monthly, up to 5 months

Failure to pay – §6651(a)(2):           0.5% of tax not paid by due date; 0.25% during Installment Agreement; 1% if tax is not paid within 10 days of notice of intent to levy.

This penalty caps at 25% of the total tax debt that remains unpaid.

Failure to pay unreported tax – §6651(a)(3):         penalty is assessed if there is a failure to pay the amount within 21 days of the IRS demand notice date. 0.5% of tax not paid by due date; 0.25% during Installment Agreement; 1% if tax is not paid within 10 days of a notice of intent to levy

Failure to remit Estimated Tax Payments – §6654:          Calculated for each required payment. The IRS will determine the number of days the Estimated Tax Payment is late and then that amount is multiplied by the interest rate for that given installment period.

Dishonored check – §6657:              2% penalty for payments $1,250 or more; $25 for payments under $1,250 (or amount of payment – whichever is less)

Interest is charged when tax amounts are not paid on time. The interest begins accruing when the tax return is due to the IRS and is accrued until the amount owed is paid in full. Interest can change quarterly as it goes by the federal short-term rate plus 3%.

 

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