Taxation & Estate Planning

PENALTY REFRESHER

By Charles Rubin

As surely as April 15 comes every year, there will be taxpayers who do not file their income tax returns on time or who do not pay their income taxes on time. Here's a quick refresher on penalties relating to income tax filings, courtesy of the IRS:

FILING LATE: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions). If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return. For any month both the penalty for filing late and the penalty for paying late apply, the penalty for filing late is reduced by the penalty for paying late for that month, unless the minimum penalty for filing late is charged.

PAYING TAX LATE: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

BOUNCED CHECKS: If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.

Do not fall into the trap of not filing your tax return on time just because you can't pay the tax on time.

Note that the above are only penalties - interest on late payments of tax will likely also apply.

FS-2008-19, March 2008

Full post as published by Rubin on Tax on April 07, 2008 (boomark / email).