What are the penalties and interest? Can they be avoided?
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In 1989, the IRS revamped its
tax penalty system. Before the reform, more than 150
overlapping tax penalties existed. Consequently, a single infraction could result in multiple
tax
penalties. Below are the current tax penalties for various infractions. |
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| Infraction: |
Penalty |
Late Filing
(If the tax return is more than 60 days late, the minimum penalty is the smaller of
$100 or 100% of the tax owed.) |
5% per month of the net tax due
(maximum 25%) |
| Late filing due to fraud |
15% per month of the net tax due
(maximum 75%) |
| Late tax
payments |
0.5% per month of the unpaid tax
due
(maximum 25%) The 0.5% rate increases to 1% after the IRS issues a notice of intent to
levy. |
| Negligence or disregard of
tax rules and regulations |
20% of
tax underpayment |
| Fraud |
75% of
tax underpayment |
| Substantial understatements of income tax
(tax underpayments that exceed the
greater of 10% of the correct tax liability or $5,000) |
20% of
tax underpayment |
| Over valuations of 200% or more but less than 400% of the correct amount |
20% of
tax underpayment |
| Over valuations of 400% or more of the correct amount |
40% of
tax underpayment |
| Estate tax and gift tax under valuations of 50% or more of the correct
valuation and if the tax underpayment exceeds $5000 |
20% of
tax underpayment |
| Estate tax and gift tax under valuations of 75%
or more of the correct
valuation and if the tax underpayment exceeds $5000 |
40% of
tax underpayment |
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| Interest, compounded
daily, is charged on any unpaid tax from the due date of the tax return until the date of
tax
payment. The interest rate is the federal short-term rate plus 3%. That rate is
determined every three months. |
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| From |
To |
Interest Rate |
| 4/1/09 |
12/31/09 |
4% |
| 1/1/09 |
3/31/09 |
5% |
| 10/1/08 |
12/31/08 |
6% |
| 7/1/08 |
9/30/08 |
5% |
| 4/1/08 |
6/30/08 |
6% |
| 1/1/08 |
3/31/08 |
7% |
| 7/1/06 |
12/31/07 |
8% |
| 10/1/05 |
6/30/06 |
7% |
| 4/1/05 |
9/30/05 |
6% |
| 10/1/04 |
3/31/05 |
5% |
| 7/1/04 |
9/30/04 |
4% |
| 4/1/04 |
6/30/04 |
5% |
| 10/1/03 |
3/31/04 |
4% |
| 1/1/03 |
9/30/03 |
5% |
| 1/1/02 |
12/31/02 |
6% |
| 7/1/01 |
12/31/01 |
7% |
| 4/1/01 |
6/30/01 |
8% |
| 4/1/00 |
3/31/00 |
9% |
| 4/1/99 |
3/31/00 |
8% |
| 1/1/99 |
3/31/99 |
7% |
| 4/1/98 |
12/31/98 |
8% |
| 7/1/96 |
3/31/98 |
9% |
| 4/1/96 |
6/30/96 |
8% |
| 7/1/95 |
3/31/96 |
9% |
| 4/1/95 |
6/30/95 |
10% |
| 10/1/94 |
3/31/95 |
9% |
| 7/1/94 |
9/30/94 |
8% |
| 10/1/92 |
6/30/94 |
7% |
| 4/1/92 |
9/30/92 |
8% |
| 1/1/92 |
3/31/92 |
9% |
| 4/1/91 |
12/31/91 |
10% |
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For current interest rates go to News Releases and
Fact Sheets and find the most recent IRS release entitled Quarterly
Interest Rates.
Acting on bad IRS tax
advice
There is no tax penalty imposed if you rely on erroneous written advice from an IRS
official. You must show that you provided accurate tax information
to the IRS when you
asked the IRS for the tax advice.
Honest mistakes
You may be able to get the IRS to drop the
tax penalty if you can show that your mistake
was an honest error. Send the IRS a check for payment of the tax and interest along with a
letter explaining how the mistake was made and a request to eliminate the tax penalty.
Disputing assessed tax penalties
Tax penalties can be avoided if the relevant facts affecting the item's tax treatment are
adequately disclosed in the tax return. However, disclosure cannot be used to avoid incorrect
valuation tax penalties.
Another way to dispute a
tax penalty is to show that substantial authority exists for your
tax treatment of an item. To establish substantial authority for a position, look to
tax
documents published in the Internal Revenue Bulletin, tax court cases, private letter rulings
issued by the IRS, and some congressional reports. Authority supporting your
tax position
should be substantial in relation to the weight of authorities supporting contrary
tax
treatment.
If a tax penalty is assessed by the IRS, you can appeal. While the appeal is under
consideration, payment of the tax penalty is suspended. You also have a right to
representation and can ask to have a meeting with the IRS.
The tax penalty for filing a frivolous
tax return is not based on your tax liability and will
be assessed immediately and added to any other tax penalties. |
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Related information
about penalties and interest |
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How to avoid an IRS audit?
How to prepare for an IRS audit?
What are my appeal rights?
How does the Statute of Limitations affect income tax
obligations?
How does the Bankruptcy Code affect income tax obligations?
Taxpayer Bill of Rights
Tax Payments and Tax Refunds
Tax Audits, Tax Collections and trouble with the IRS |
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IRS publications about
penalties and interest:
For more details on IRS penalties and interest refer to Tax
Topic 653, IRS Notices and Bills/Penalty and Interest Charges, and
IRS Publication 594, Understanding
the Collection Process. For further information on the appeals process, refer to
Tax
Topic 151, Your Appeal Rights. Also see
IRS Publication 1,Your Rights as a
Taxpayer,
IRS Publication 5, Appeal
Rights,
IRS Publication 556, Examination
of Returns, Appeal Rights.., and
IRS Publication 17, Your Federal
Income Tax. |
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IRS Links:
IRS
Appeals
IRS Problem
Resolution Office
IRS
Taxpayer Advocate |
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Ask Julian Block your IRS and tax questions! |
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If you can't find the answer to your IRS or tax question in our
web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax
Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine. To
call Julian for a tax consultation click
here. |
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