How to Calculate IRS Late Charges

If you fail to pay your taxes by the April 15 deadline, the Internal Revenue Service will impose penalties and interest on the balance owed. The IRS assesses penalties monthly until the amount reaches 25 percent of your total tax due. Interest is compounded each month, meaning it's assessed on the total balance, including the previous months' interest. You can avoid owing exorbitant amounts to the IRS by paying the tax debt off as quickly as possible.

Determine your late payment penalty amount. If the IRS has notified you that it intends to seize your property, bank-account funds or future tax returns to satisfy the tax debt, the penalty is 1 percent of the balance owed. If the IRS agreed to an installment plan to pay the taxes, the penalty is one-quarter of one percent, or 0.25 percent. For all other cases, the penalty amount equals one-half of one percent, or 0.5 percent. For example, if you owe $1,000 and have a 0.5 percent penalty amount, your penalty is $50. This is added to your balance every month from the date the taxes were due until the total tax debt is paid.

Multiply the amount you owe by the penalty percentage and add that figure to the balance. For example, if you owe $1,000 and have a 0.5-percent penalty amount, the penalty equals $50 and your total balance is $1,050.

Go to the IRS website to find the current federal short-term interest rate. Add an additional 3 percent to this figure to calculate the amount of late-payment interest you are being charged. For example, if the current federal short-term interest rate is 0.25 percent, add 3 percent to that to get 3.25 percent.

Multiply the amount you owe, including the penalty amount, by the late-payment interest and add the resulting figure to the balance to calculate the total you owe for the current month. For example, if your taxes plus penalty equals $1,050 and the late-payment interest you owe is 3.25 percent, the interest for that month equals $34.13, and your total balance is $1,084.13.

Compound the interest each month by multiplying the previous month's total balance by the interest percentage and adding that figure to the balance. For example, if your previous monthly balance was $1,084.13, the compounded interest equals $35.23 and your total balance increases to $1,119.36.


About the Author