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IRS Penalties and Interest: How Does Uncle Sam Calculate it?

IRS Penalties and Interest: How Does Uncle Sam Calculate it?

If you do not pay your taxes on time, interest and penalties will accrue with time. As a result, it is in the best interest of taxpayers to make payments when due. 


Statute of Limitations

Unfortunately, failure to file your tax return and report of payroll tax come with no Statute of limitations. Examples of such payroll taxes are unemployment tax, Medicare taxes, Social security, and withheld taxes. Also, interest and penalties due to false tax returns and tax assessments do not have a statute of limitations. 

The employment tax of households is usually remitted alongside the 1040 income tax return. Anyone that employs household workers but does not pay the tax can be considered to have submitted a false tax return, which is likely going to trigger a penalty. 


Types of IRS Penalty Charges

Penalty charges from the IRS come in various forms as discussed below:


Penalties for late filing 

People that do not file their tax returns on time for penalties owed will have penalties accessed and included in their bill. Sadly, penalties do not only apply to tax due but to interest in taxes owed. Every month, a taxpayer will likely be subjected to 5% of the total tax owed every month. It can also be part of the month in which you have a late return for five months, which equals 25%. For a late tax return for more than 60 days, the IRS will subject the defaulter to either $100 or 100% of the tax – whichever is smaller. 


Penalties for late payment

There is also a penalty for filing on time and not making the payment on time. Generally, the defaulter will have to pay 0.5% of the exact tax they owe every month, or any part of the month for which the tax was not paid, counting from the due date until the date the tax was fully paid. 

I

nterest Charges

There are interests on taxes that are late or unpaid, no matter the cause. This generally will start from the exact due date on the tax return and stops on the date Uncle Sam gets the receipt of payment. There could be an interest expense for filing late, and a simple math error on your return could also trigger this. 

Generally, the interest is applied to taxes not paid from the exact due date present on the return to the payment date. All unpaid federal taxes have an interest rate that is specified and made available once in three months. 


IRS Interest and Penalties: Abatement 

Uncle Sam specified that one needs to fully pay any penalty and interest before there is a determination for abatement. Paying the bills will trigger an end to the meter, which will cancel all additional charges. 

The general rule is to have a cause before requesting a penalty abatement. If a taxpayer is slammed with late payment interest, there might not be abatement, except the circumstance is out of the ordinary. With an interest abatement, the taxpayer must make available proof that the undue delay is the fault of one of the staff of the IRS.

A taxpayer who decides to contact the IRS and correct an error in a tax return filed previously will be successful in requesting a penalty abatement. However, the error must not be discovered by an audit, and the taxpayer must come forward voluntarily. 

In requesting a penalty abatement, one needs to contact the IRS office where the bill was issued in writing within the time made available by Uncle Sam. The cause must be explained clearly, and any supporting documentation must be submitted.


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