I remember it was the last semester of college and had a full blown case of senioritis. I was working on my final project for my capstone business course regretting that I had waited until close to the last minute to get it finalized. This story sound familiar to anyone else’s? Many people take this same approach with the March 15th or April 15th deadline business or individual tax e-filing deadline. Sure you can file a 6 month extension but what many people do not realize is that extension is for filing not for paying. So if you have not paid at least 85% of your tax liability for that year they could charge you a failure to file penalty. Also filing late, not reporting income or misstating income can result in other penalties. Here is a summary of a few of the hammers in the IRS toolbelt to keep this in mind as you prep for this and last year.
Common Penalties:
Failure to file – when you don’t file your tax return by the return due date, April 15, or extended due date if an extension(form 4868 or 7004) to file is requested and approved.
Calculated penalties
5% of unpaid tax required to be reported
Reduced by the “failure to pay” penalty amount for any month where both penalties apply
Charged each month or part of a month the return is late, up to 5 months
Applies for a full month, even if the return is filed less than 30 days late
Income tax returns are subject to a minimum late filing penalty when filed more than 60 days after the return due date, including extensions. The minimum penalty is the LESSER of two amounts – 100% of the tax required to be shown on the return that you didn’t pay on time, or a specific dollar amount that is adjusted annually for inflation. The specific dollar amounts are:
$215 for returns due on or after 1/1/2020
$210 for returns due between 1/1/2018 and 12/31/2019
$205 for returns due between 1/1/2016 and 12/31/2017
$135 for returns due between 1/1/2009 and 12/31/2015
$100 for returns due before 1/1/2009
Example
You file after the tax deadline without an extension and owe $5K. You will pay a $250 penalty in addition to the failure to pay penalty depending on the length of time it takes to pay.(See example below)
Failure to pay – when you don’t pay the taxes reported on your return in full by the due date, April 15.
Calculated penalties
0.5% of tax not paid by due date, April 15; 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy
Recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25% is reached
Full monthly charge applies, even if the tax is paid before the month ends.
Example
You file on time but owe $5,000 and pay the balance 110 days after the April 15 deadline. Well, by the daily interest calculation described earlier, this taxpayer would owe $45.21 in interest charges. And, since 110 days is more than three months but less than four, they would have to pay four months’ worth of late payment penalties, or 2% of the balance (0.5% times four months). This translates to a late payment penalty of $100. So, interest and penalties add up to $145.21 in this case.
Failure to pay tax not reported on original return and not paid in full within 21 days of the date of notice and demand; 10 business days if the amount in the notice and demand equals or exceeds $100,000: Internal Revenue Code §6651(a)(3)
0.5% of tax not paid by due date in notice – generally 10 or 21 calendar days from notice date, 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy
Recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid
Full monthly charge applies, even if the tax is paid before the month ends.
Failure to pay proper estimated tax – when you don’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding.
Calculated Penalties
Estimated tax payments are generally required, if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits.
Use Form 2210 to calculate
Any installment agreement the penalty is calculated separately for each one. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.
Dishonored check – when your bank doesn’t honor your check or other form of payment
For payments of $1,250 or more, the penalty is 2% of the amount of the payment.
For payments less than $1,250, the penalty is the amount of the payment or $25, whichever is less.
Payroll Taxes
Employers who collect W-2 wages(including solo S-corps)
For deposits made 1-5 days late, the penalty is 2% of the past due amount.
For deposits made 6-15 days late, the payroll tax penalty is 5% of the past due amount.
For deposits made 16 or more days late, the penalty amount is 10% of the past due amount.
Payroll tax penalties increase to 15% of the past due amount if the IRS has sent a notice requesting the tax due and it remains unpaid for more than 10 days after that notice was received by the business. The amount of the late deposit penalty is calculated using calendar days starting with the due date of the payroll tax deposit.
Penalty for sending late 1099 or W-2
$50 Per return
Terrance Hutchins, CLU, CFP, RICP, EA|
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