How Do I? Compute a late payment penalty

The tax code imposes a penalty on taxes that are paid after the due date (generally April 15). Taxpayers may wonder whether to save, to pay their taxes on time and avoid the penalty, or delay payment and owe a penalty. While this is a personal decision, and will vary with the taxpayer’s circumstances, a taxpayer may prefer to use their funds for other purposes and delay the tax payment, especially where the penalty is relatively small.

General penalty

If an individual files a return on pay but fails to pay all of the tax shown on the return, there is a penalty of 0.5 percent of the unpaid tax, for each month or partial month of the delinquency period. There is a cap of 25 percent on the total failure-to-pay tax, with the maximum normally reached after 50 months of taxes due.

If the actual tax liability is less than the amount shown on the return, the penalty is also imposed on the difference between the actual tax liability and the amount paid. Thus, the 0.5 percent penalty is imposed on additional taxes determined to be due on audit for which the IRS has made a demand for payment. This penalty does not begin until the 22nd calendar day after the demand.

The penalty runs from the date prescribed for payment of the tax, until the IRS receives payment. Taxpayers can generally get a six-month extension for filing their return, but this does not extend the payment due date.

Payments

The basic failure-to-pay penalty applies if a taxpayer files, either on time or late, a return that shows a tax liability, where the taxpayer fails to pay the tax admittedly owed. Any credits that may be claimed on the return reduce the amount on which the penalty is imposed. These credits against the tax include withholding, estimated taxes, and any other timely payments, such as an amount from the prior year’s refund that the taxpayer asked the IRS to retain and apply against the current year’s tax. A partial payment after the due date of the taxes paid also reduces the amount of the penalty.

Installment agreements

The penalty is reduced to 0.25 percent per month for any period in which the taxpayer has an installment agreement with the IRS. The reduction does not take effect until the IRS accepts the agreement. The maximum penalty of 25 percent is not affected, but will not be reached until 100 months.

Loans

The IRS also advises that taxpayers may be able to borrow funds from a third party at a lower rate than the penalty, use those funds to pay their taxes on time, and owe less interest to the third party than they would have to the IRS.

Examples

Angie’s return and tax are due April 15. She files the return on June 17, paying her tax liability of $5,200 in full. The failure-to-pay penalty applies for three months, at 0.5 percent per month on $5,200. The total penalty is $78 ($26 per month times three months). The number of months is counted beginning from the April 15 due date; thus, the second month of penalties applies for May 15 to June 14, and the third month applies for June 15 to June 17.

Lee’s return and tax are due April 15. Lee files on October 15, showing $7,000 due in taxes. He pays $2,000 with the return, and pays the balance of $5,000 on May 3 of the following year. The failure to pay penalty applies to the $7,000 owed for seven months and to $5,000 for six months. The penalty thus equals $245 ($35 per month on $7,000, times seven) plus $150 ($25 per month on $5,000, times six), or a total of $395.

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Content provided by CCH. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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