What Is IRS Interest Penalty?
The Internal Revenue Service imposes penalties and interest on the amount of taxes you owe if you file past the deadline. There are three separate penalties: failure to file penalty, failure to pay penalty, and interest. You may be subjected to all three penalties depending on your filing situation.
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Failure to File Penalty
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You have to file your federal tax return by the due date in order to avoid a failure to file penalty. If you owe federal taxes and don't file on time -- usually by April 15 -- you will be charged a failure to file penalty. The failure to file penalty is 5 percent of the tax you owe for each month you don't file up to a maximum of five month's penalty. The minimum penalty is $135 or 100 percent of the tax you owe for returns more than 60 days late.
Failure to Pay Penalty
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If you file your tax return on time but don't pay your taxes when they are due, the IRS imposes a failure to pay penalty. The failure to pay penalty can be as high as 25 percent; to calculate how much you owe as a failure to pay penalty, add one-half of 1 percent of the tax you owe for each month you are late. For example, if you are one month late paying taxes of $1,000, then you will owe 1.005 percent times $1,000, which equals $1,005.
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Interest
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Interest is calculated on any unpaid taxes from the date of the tax return to the date you pay the IRS. The interest is calculated every quarter based on the federal short term rate, plus an additional 3 percent. For example, if the federal short term rate is 0.4 percent, the interest will be 0.4 percent plus 3 percent equaling 3.4 percent.
Increases and Reductions in Interest and Penalties
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If you receive a notice to levy from the IRS and fail to pay your taxes within 10 days, the failure to pay penalty increases to 1 percent. In some cases, you may be able to get a reduction in the interest rate; as long as you filed your return on time, the interest rate decreases from one-half of 1 percent rate to one-quarter of 1 percent if you make an installment agreement with the IRS and make timely payments.
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