How Does the IRS Calculate Tax Debt Penalties and Interest?

How Does the IRS Calculate Tax Debt Penalties and Interest?

Failure to pay tax debts owed to the IRS can accrue penalties and interest that are added to the original tax amount. The IRS typically charges tax penalties for various reasons and understanding the types of IRS tax penalties and the circumstances surrounding the tax debt penalties can help you plan to avoid them.

What Are the Types of IRS Tax Penalties?

The following are the common tax penalties that the IRS imposes on delinquent taxpayers:

  • Late filing penalties: If you fail to file your taxes by the deadline, a tax penalty is assessed and added to your tax bill. The total tax penalty for filing taxes late is typically 5% of the tax owed each month that your return is late for up to five months.
  • Late payment penalties: If you file on time but fail to pay the full tax amount due, you will be assessed a late payment penalty of 0.5% of the tax owed for every month a tax balance due remains, until you pay off what you owe in full.

You may also incur penalties if you:

  • Prepare an inaccurate return
  • Provide inaccurate information in your returns

How Much Is the Total Late Filing and Late Payment Tax Penalty Amount? Is There a Maximum?

The highest total tax penalty for failure to file and/or pay in full is 47.5% of your tax owed amount (25% late payment and 22.5% late filing).

When Does the IRS Start Charging Interest?

The IRS typically charges interest on all delinquent or unpaid taxes, no matter the cause. The date from which the IRS begins to charge interest varies by the type of penalty. Generally, the period covered by the interest begins with the original due date of your tax return and ends once you pay the IRS taxes owed in full.

The following are some key points to keep in mind when it comes to the IRS interest on tax balance/penalties:

  • Notably, the interest rate for taxpayers other than corporations is the federal short-term rate plus 3%.
  • The interest rates on unpaid taxes change every three months. However, the interest on unpaid tax is compounded daily.
  • Once you pay the tax bill the meter stops, and you will not accrue additional interest charges.
  • If any of your tax debts or tax penalties are reduced, the IRS automatically lowers the related interest.

How Will I Know If I Owe an IRS Penalty and/or Have Accrued Interest?

Before they charge you a tax penalty, the IRS sends a notice or letter by mail to your last known address. This indicates the type of tax penalty, the reason for the charge, and your options. Once you receive the IRS notice, verify the information to determine if it is correct. If there are any errors, contact the IRS as soon as possible and correct the issue before tax penalties are applied. Some of the tax penalties that the IRS sends notices and letters about include:

  • Information return: You will get a notice if you do not file or provide the required information.
  • Accuracy-related: Applies if a taxpayer does not claim all their income. It also applies if a taxpayer claims deductions or credits for which they do not qualify.
  • Failure to file: Applies If you do not file your tax return by the due date.
  • Failure to deposit: Applies if a taxpayer fails to pay employment taxes accurately or on time.
  • Failure to pay: Applies if you do not pay what you owe by the due date.

Is There a Statute of Limitations for Issuing Late Filing and/or Late Payment Tax Penalties?

There is no statute of limitation on failing to file and report any payroll taxes such as withheld income taxes, unemployment, social security, or Medicare. The IRS does not also impose a statute of limitation on assessment tax, penalties, and interest if a taxpayer files a false tax return.

How Can I Settle My Tax Debt to Minimize My IRS Penalties and Interest?

Some of the available tax relief options to minimize or settle your tax debt and accrued tax penalties and interest include:

  • Pay the tax debt and penalty: You can pay the due tax and the accrued penalties in full to stop future penalties and interest from adding up.
  • Reduce tax: Ideally, if you owe less tax, you owe less interest, too. Look for ways to reduce your taxes or remove them completely.
  • Reduce penalties: If you remove or reduce tax penalties, you can save interest penalties. Start by analyzing the four types of penalty abatement options (first-time penalty abatement, reasonable cause, IRS errors, and legal exception to penalties). Determine the option you may qualify for and submit your request to IRS.
  • Monthly IRS payment plan: If you cannot pay your full tax balance due, set up a monthly payment plan with the IRS. An installment agreement can help lower your failure to pay tax penalties and interest.
  • Hardship Status: If you request “Currently Not Collectible (CNC)” and your request is accepted, you will not need to make tax payments until your financial situation improves
  • Offer in Compromise (OIC): Submit an offer to the IRS to settle your tax debt for less than the total amount you owe.

How Can Wiztax Help?

If you’re unable to pay off your full tax debt, Wiztax will help you solve your tax issue. We provide an all-inclusive Wiztax Solution Plan that includes all-inclusive pricing with no hidden fees, 100% Satisfaction Guarantee (cancel anytime), Offer in Compromise, Hardship Status, IRS Payment Plans, IRS Notices Support, Audit Protection, and more. Call us today at (866) 568-4593 to learn more, or start here.

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