IRS Tax Penalties & Interest

IRS Penalty & Interest Tips


IRS Penalties and Interest Overview

The Internal Revenue Service (IRS) commonly charges penalties and interest against delinquent taxpayers.  Typically, taxpayers are assessed fines when they don’t file tax returns and fail to pay taxes owed.  The Internal Revenue Service uses tax penalties as form of punishment against taxpayers.  The IRS has the ability to impose over one-hundred fifty tax penalties.  However, the average taxpayer may only ever see 3 of these tax code penalties.


Most Common Tax Penalties

Of the many tax penalties the IRS may levy, a delinquent taxpayer will most likely be dealing with the following three:

1. Failure to File Tax Penalty (FTF)

Failure to File Penalties are imposed by the IRS, when a taxpayer owes taxes and fails to file their tax return on time.  Penalties incurred usually amount to, five percent of taxes owed, for each month the return is late.  Maximum amounts charged by the IRS may may not exceed, twenty-five percent.  Also, if tax returns are over 60 days late, a minimal FTF penalty applies.  FTF minimum penalties are the lessor of, $205 or, 100% of back taxes owed.

2. Failure to Pay Penalty (FTP)

Filing a tax return without paying taxes owed will incur, a Failure to Pay Penalty.  FTP penalties amount to, one half of one percent for each month or, partial month, back taxes remain unpaid.   FTP penalties increase to one percent, 10 days after the IRS issues a notice of intent to levy property.  If you engage into installment agreement at the time you file a timely tax return, penalties will be less.  Penalties under these conditions are only, one-quarter of one percent for each month a payment plan includes.

It is important to note, any payments made towards your total back tax debt, are applied first, against unpaid back taxes.  After back taxes are paid, the remaining payments will be applied to penalties; and then to interest accrued.

3. Interest Penalties

Generally, unpaid back taxes accrue interest from the original date your tax return was due.  Interest charges are NOT assessed on IRS penalties.  Furthermore, interest compounds daily from the date your tax return should have been filed.  Rates for interest penalties vary and are correlated with the federal short term interest rate.  Interest rates are calculated by adding 3 percent to today’s fed funds rate and may change quarterly.


Removing or Reducing IRS Penalties and Interest

An IRS penalty abatement is a common part of tax settlement.  IRS tax debts may be greatly reduced since, penalties may account for over 50% of your tax liability.  Always apply for a penalty abatement when your penalties are substantial.  Generally, the IRS is less accommodating, when it comes to removing interest on unpaid taxes.  IRS penalty abatement may prove to be difficult and, we recommend professional advice before starting the process with the IRS. (Ask A PRO)

IRS Penalty Abatement Tips