April 15th is the deadline for most people to file their individual income tax return and pay any tax owed this year. During processing, the return is checked for mathematical accuracy and the tax due is compared to all amounts paid. If there is any money owed, the IRS will send the taxpayer a bill.
If you owe additional tax, penalties and interest may be assessed—depending on the circumstances. Here are a number of common situations in which penalties and interest may be added to your tax due:
Penalties:
- Failure to File = 5% per month the return is late
- Late Payment = 0.5% per month the payment is late
The combined penalty is 5.5% for each month, or part of a month, that your return is late, up to 25%. The late-filing penalty applies to both the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax and any timely payments made with the return. After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run up to 25% until the tax is paid. Thus, the total penalty for failure to file and pay can be 50% (25% late filing, 25% late payment) of the tax owed. Also, if your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $135 or 100% of the tax required to be shown on the return.
In addition, if you filed on time but didn’t pay on time, you’ll generally have to pay a late-payment penalty of one-half of 1% of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, up to 25%. The one-half of 1% rate increases to 1% if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.
Exception
You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect.
If you file a timely return and are paying your tax pursuant to an installment agreement, the penalty is one-quarter of 1% for each month, or part of a month, that the installment remains unpaid.
If there is a refund due to you, no penalty for late filing or late paying will be charged. The penalty is based upon the unpaid taxes as of the due date of the return.
Accuracy-related penalty = 20% of the underpayment
You may have to pay an accuracy-related penalty if:
- You underpay your tax because of either “negligence” or “disregard” of rules or regulations, or
- You substantially understate your income tax.
The penalty is equal to 20% of the underpayment. The penalty will not be figured on any part of an underpayment on which the fraud penalty is charged.
Negligence or Disregard = 20% of Underpayment Attributable to Negligence or Disregard
The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You will not have to pay a negligence penalty if you have a reasonable basis for a position you took.
The term “disregard” includes any careless, reckless, or intentional disregard.
Frivolous Return Penalty = $5,000.00
You may have to pay a penalty of $5,000 if you file a frivolous return. A frivolous return is one that does not include enough information to calculate the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.
A frivolous position on your part or a desire to delay or interfere with the administration of federal income tax laws will initiate this penalty. This includes altering or striking out the preprinted language above the space provided for your signature.
This penalty is added to any other penalty provided by law.
The penalty must be paid in full upon notice and demand from IRS even if you protest the penalty.
Fraud Penalty = 75% of the underpayment
If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax.
Joint Return
The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.
Failure to Furnish a Social Security Number = $50 for each failure
If you do not include your social security number (SSN) or the SSN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. You will also be subject to a penalty of $50 if you do not give your SSN to another person when it is required on a return, statement, or other document.
For example, if you have a bank account that earns interest, you must give your SSN to the bank. The number must be shown on the Form 1099-INT or other statement the bank sends you. If you do not give the bank your SSN, you will be subject to the $50 penalty.
You will not have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect.
Criminal Penalties
You may be subject to criminal prosecution for actions such as:
- Tax evasion;
- Willful failure to file a return, supply information or pay any tax due;
- Fraud and false statements, or
- Preparing and filing a fraudulent return.
There are many other penalties that may be assessed on individuals and businesses, depending on the type and impact of the action taken on their part. To learn more about these penalties, visit the Internal Revenue Service website at www.irs.gov.
Interest
Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3%. The federal short-term rate is determined every three months.
The current interest rates (for the quarter beginning January 1, 2013) are:
- Overpayments for Individuals: 3%
- Overpayments for Corporations: 2% and 0.5% for portion exceeding $10,000
- Underpayments for Individuals and Small Corporations: 3%
- Underpayments for Large Corporations: 5%
You must file your return and pay your tax by the due date to avoid interest and penalty charges. Often the funds necessary to pay your tax can be borrowed at a lower effective rate than the combined IRS interest and penalty rate. If you would like further information regarding this topic or any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
