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Bob Parrish C PA. P.C.
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Tax Interest & Penalties A
Summary
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Disclaimer and Warning - From Bob Parrish CPA, P.C. This article may be used for basic information and educational purposes. This is not intended to apply to specific circumstances and is for "general knowledge only". Reading of this article is subject to the blanket and general disclaimers attached hereto - Disclaimer for all except securities related articles
InterestFor individual income tax returns, tax is to be paid on the due date of the return, usually April 15. If the tax is not paid by the due date of the return, interest is charged at the rate in effect from that period to the date of payment in full. Interest is compounded daily and adjusted quarterly. Section 6601 of the Internal Revenue Code provides for interest on underpayment, nonpayment, or extensions of time for payment, of tax. Generally, if any amount of tax imposed by the Internal Revenue Code "is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under Section 6621 shall be paid for the period from such last date to the date paid." PenaltiesFor individual income tax returns, the return is to be filed on the due date. If the return is not filed, and tax is owed and not paid by the due date of the return, failure to file penalty is charged. The penalty amount is 5 percent of the outstanding tax amount per month for the first month, with an additional 5 percent for each month or part of a month. The penalty is charged until the return is filed and the tax is paid, or the penalty assessed is 25 percent of the tax amount owed. The penalty is assessed on net tax due, tax amount after deducting payments and credits. Failure to File (Late Filing)Section 6651 of the Internal Revenue Code provides for penalty assessments in addition to tax and interest for certain conditions. In case of 6651(a)(1) failure to file any return required under authority of the Internal Revenue Code "unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which failure continues, not exceeding 25 percent in the aggregate." For individual income tax returns, the tax is to be paid and the return filed on the due date. If the return is filed, and tax is owed and not paid by the due date of the return, failure to pay penalty is charged. The penalty amount is 0.5 percent of the outstanding tax amount per month for the first month, with an additional 0.5 percent for each month or part of a month. The penalty is charged until the tax is paid in full, or the penalty assessed is 25 percent of the tax amount owed. The penalty is assessed on net tax due. This penalty is increased to 1 percent per month or part of a month once the Internal Revenue Service makes notice and demand for immediate payment. Failure to Pay (Late Payment)Section 6651(a)(2) - In case of failure to pay the amount shown as tax on any return
"on or before the date prescribed for payment of such tax (determined with regard to
an extension of time for payment), unless it is shown that such failure is due to
reasonable cause and not due to willful neglect, there shall be added to the amount shown
as tax on such return 0.5 percent of the amount of such tax if the failure is for not more
than 1 month, with an additional 0.5 percent for each additional month or fraction thereof
during which such failure continues, not exceeding 25 percent in the aggregate." The Restructuring and Reform Act of 1998 provides for a reduction in the failure to pay penalty. The penalty is reduced when the return is timely filed and the taxpayer enters in to an installment agreement prior to the Internal Revenue Service notice and demand for immediate payment. The penalty is reduced only if the taxpayer timely filed the return relating to the liability that is subject to the installment agreement. Late filed returns do not received the reduction in the failure to file penalty. The penalty amount will be reduced to half the usual rate, from .5 percent to .25 percent per month, for any month in which an installment agreement with the Service is in effect. This reduction will be effective for months beginning after December 31, 1999. Section 6651(h) - Limitation on penalty on individual's failure to pay for months
during period of installment agreement (effective Dec. 31, 1999). In the case of an
individual who files a return of tax on or before the due date for the return (including
extensions), paragraph (2) of subsection (a) "shall be applied by substituting 0.25
for 0.5 each place it appears for purposes of determining the addition to the tax for any
month during which an installment agreement under section 6159 is in effect for the
payment of such tax."
Accuracy-Related
Penalty Disclosures
The law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial understatement exists when the understatement for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. The penalty is 20 percent of the tax underpayment. Taxpayers may seek to avoid all or part of the penalty by showing (1) that they acted in good faith and there was reasonable cause for the understatement, (2) that the understatement was based on substantial authority, or (3) that the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. You agree to advise me if you wish disclosure to be made in your returns or if you desire me to identify or perform further research with respect to any material tax issues for the purpose of ascertaining whether, in my opinion, there is “substantial authority” for the position proposed to be taken on such issue in your returns. Estimated Tax Payments
The tax laws require that you pay taxes on income as you receive the income. This is commonly known as the “Pay as you Earn” or “Pay as you Go” rule. The proper form for individual income tax is the Internal Revenue Service prescribed form 2210. Other types of tax will require other forms. For the individual income tax, the deadlines are four times per year. The paragraph below summarized the penalty for not following the rules for estimated taxes. The failure to pay estimated tax penalty is based upon the
number of days that the payment is late and the current interest rate.
Therefore, we cannot give a percentage that applies for all cases. To
compute the amount of the estimated tax penalty you will need to refer to Publication
505, Tax Withholding and Estimated Tax and Form
2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
for directions on computing the penalty. Since the computations can get
rather complicated, you may want to just send in the estimated tax payment
and wait for a bill from us for the interest and penalty.
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