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How Does the IRS Calculate Penalties

According to law, IRC § 6651(a)(1), the your Internal Revenue Service has to impose penalty for failure to pay tax that is due on your return. The same law, IRC § 6651(a)(2), provides the IRS with percentage of penalty to impose or fine the taxpayer. The IRS calculates penalties according to law and their code.

Common IRS Penalty Calculations According to Code

For failure to file your taxes,the IRS will penalize you unless you show that you have had a reasonable cause to not file. You must have them approve your reasonable cause. If you are found to be in willful neglect for failing to file your taxes then you will be charged an additional 5% of the amount shown as tax if the failure is not for more than 1 month. For each additional month that you fail to file, you will be charged and additional 5%, and this cannot exceed 25% in the aggregate. You can see why requesting an extension is necessary if you foresee that you will not be filing your return on April 15th.

Even if you have applied for and received an extension on filing, you should be aware of IRS penalties. Incoming tax returns can be subject to a minimum late filing penalty when filed more than 60 days after the return due date, including extensions. The minimum penalty is the LESSER of two amounts; either 100% of the tax required to be shown on the return that you did not pay on time, OR a specific dollar amount that is adjusted annually for inflation. The IRS has laid out guidelines for those specific dollar amounts which are:

  • $435 for returns due on or after 1/1/2020
  • $210 for returns due between 1/1/2018 and 12/31/2019
  • $205 for returns due between 1/1/2016 and 12/31/2017
  • $135 for returns due between 1/1/2009 and 12/31/2015
  • $100 for returns due before 1/1/2009

If you fail to pay tax reported on your return, the IRS will fine you 5% of tax not paid by the due date of April 15th. They will charge you 0.25% during any approved installment agreement (if return was filed on time and the taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy. You will be penalized with additional charges for any remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25% is reached.

For failure to pay tax not reported on original return and not paid in full within 21 days of the date of notice and demand correspondence; 10 business days if the amount in the notice and demand equals or exceeds $100,000, 5% of tax not paid by the due date in the notice, which is typically 21 calendar days from the notice date, 10 business days if the balance equals or exceeds $100,000; 0.25% during approved installment agreement (if return was filed on time and the taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy. This will be a recurring monthly charge on the remaining unpaid tax each month or part of a month following the due tax, until the tax debt is fully paid.

With regards to estimated tax, the IRS uses Code §6654 an §6654 and says that estimated tax payments are required if you expect to owe $1000 or more when the return is filed. If your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your incoming and making unequal payments. Our knowledgeable tax attorneys can work with you to ensure that the proper forms are filed on your behalf and you can have the IRS calculate your penalty separately for each require installment. The IRS will calculate the number of days late and then multiply by the effective interest rate for the installment period. You can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. You may meet the criteria for a waiver of this penalty, and we can help you properly assess and request a waiver of this penalty.
If you provide the IRS with a returned check, or dishonored form of payment, IRS Code §6657 says that for payments of $1,250 or more, the penalty you will face will be 2% of the amount of the payment. For payments that are less than $1,250, the penalty is the amount of the payment or $25 whichever is less.

You can learn more about situations in which you will be assessed an IRS penalty on the information that we provide on tax penalties and what to expect. If you owe back taxes, or have not filed your returns for the year by the extension deadline at the latest, you need to contact us for help. You have options, and we can help you understand what those options are to avoid more tax penalties and interest fees. We are off a Free Confidential Tax Consultation to assess your specific needs and situation.

At McCauley Law Offices, P.C., our lawyers will find a solution to your tax problems, no matter how complex your IRS issue is. View our services and contact us (or call 610-388-4474) to schedule a free consultation with one of our tax attorneys. View and purchase Gregory McCauley’s published work “TAXJAMS: Simple Solutions” on Amazon. From our office in Chester County, Pennsylvania, we find tax solutions for clients throughout the country.

McCauley Law Offices can help!

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