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  • Writer's pictureBrian Barto

What Are IRS Penalties and Interest?

Updated: Jun 21, 2021

The IRS loves to apply penalties and interest to your back tax debt. We work with clients in Winchester, VA, and Martinsburg, WV to resolve their tax issues.

Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily.

In addition, if you file a return but don't pay all tax owed on time, you'll generally have to pay a late payment penalty. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.

If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.

If you owe tax and don't file on time, there's also a penalty for not filing on time. The failure-to-file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $435 (for tax returns required to be filed in 2020) or 100 percent of the tax owed.

If you didn't pay enough tax during the year, either through withholding or by making timely estimated tax payments, there is potentially another penalty called underpayment of estimated tax. Generally, you won't have to pay this penalty for 2019 if any of the following apply.

• The total of your withholding and estimated tax payments was at least as much as your 2018 tax (or 110% of your 2018 tax for individuals with higher incomes: over $150,000, or $75,000 if Married Filing Separately) and you paid all required estimated tax payments on time;

• The tax balance due on your 2019 return is no more than 10% of your total 2019 tax, and you paid all required estimated tax payments on time;

• Your total 2019 tax minus your withholding and refundable credits is less than $1,000;

• You didn't have a tax liability for 2018 and your 2018 tax year was 12 months; or

• You didn't have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

Taxpayers should file even if they can’t pay. Filing and paying as soon as possible will keep interest and penalties to a minimum.

No penalty if reasonable cause. Taxpayers will not have to pay a failure-to-file or failure-to-pay penalty if they can show reasonable cause for not filing or paying on time.

At Tax Debt Resolution Services of Winchester VA, we help our clients in Winchester VA, Strasburg VA, Martinsburg WV and Charles Town WV to resolve their tax debts! We know all about setting up installment agreements with the IRS and how to request penalty abatement. If you need assistance please feel free to contact me at 540-662-4432 or,

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