EXPLANATION OF PENALTIES AND INTEREST LEVIED ON INDIVIDUAL TAX RETURNS

These are the four major instances where the IRS will charge interest and/or penalties.

• Failure to file a return penalty
  • This penalty is levied if a tax return is not filed by its due date, including extensions (generally April 15^th, or October 15^th with an extension).
  • The penalty is 5% of the tax due for each month that the return is late, up to a maximum of 25%.
• Failure to pay penalty
  • This penalty is levied if all taxes owed are not paid by the due date of the return, not including extensions (generally April 15^th).
  • The penalty is 0.5% of the tax due for each month that the tax is not paid, up to a maximum of 25%.
• Penalty for underpayment of estimated tax
  • This penalty is levied if not enough tax was paid via estimated payments or withholding throughout the year.  To avoid this penalty you must either:
    • Owe less than $1,000 after subtracting withholding and credits from your tax due.
    • Paid in at least 90% of the tax for the current year, or paid in 100% (110% for certain high income taxpayers) of the tax shown on the return for the prior year – whichever is less.
• Interest on unpaid taxes
  • Interest is charged on any unpaid tax from the due date of the return, not including extensions (generally April 15^th).
  • The interest rate charged is determined quarterly and is the federal short-term rate plus 3 percent.  (In November 2016 the short term rate was 0.68%)