How to Calculate the Late Penalty for Filing Taxes

Penalties for late returns can go as high as 100 percent of the balance due.

Penalties for late returns can go as high as 100 percent of the balance due.

April 15 is one of the least popular days of the year. The Internal Revenue Service knows this, but it's also fairly lenient if you haven't gotten your act together and need to file a free income tax extension to October 15. That's why the penalties are steep for late filers with balances due. The penalty for failing to file is 5 percent of the tax owed per month or part of a month past the deadline, up to a maximum of 25 percent. One bright spot is that the IRS will gladly calculate your penalty and send you a bill.

Count how many months or partial months the return is late. Even one day late counts as a full month. If April 15 (or October 15 for extensions) falls on a weekend or holiday, the due date for the return is the next business day.

Multiply the number of months by 5 percent. If your return is more than five months late you'll automatically get the maximum penalty of 25 percent of the tax due.

Multiply the total penalty percentage by the amount of tax due. If you are three months late and you owe $2,000 to the IRS, your penalty will be $300 (15 percent x $2,000). If your return is more than 60 days late your minimum penalty will be $135 or 100 percent of the tax due, whichever is smaller.

Calculate the interest. The IRS will charge you interest on the unpaid tax in addition to the penalty. The rate is the current federal short-term rate plus 3 percent. As of 2012 the IRS interest rate was 3 percent on individual returns

Tips

  • The IRS doesn't expect you to calculate the penalty and interest yourself with your late return. Instead, they will mail you a letter detailing the penalties once your return is processed and any payments are deposited. Pay the bill promptly, or call the number on the letter to set up a payment plan.
  • If you are due a refund, there is no penalty for filing late. However, you must file the return within three years from the original due date to claim the refund. Depending on your income level, you must file a return whether or not you have any tax liability, so play it safe and file whether you owe or not.
  • You only owe a penalty on the amount of tax unpaid at the time your return is filed, not the total tax liability for the year. So you aren't penalized on the amount covered by withholding or estimated tax payments.
  • If you delay filing because you can't pay a balance due, you're actually accruing higher penalties than if you filed on time. The penalty for failure to pay a balance due is only 0.5 percent per month, plus interest. You're better off filing and arranging a payment plan for the unpaid taxes. The IRS makes setting up a plan simple. You can even do this online.

Warning

  • If you filed an extension but didn't pay a balance due by April 15, you're already racking up late payment penalties of 0.5 percent per month, even though your return isn't officially due until October 15. The IRS expects payment by April 15 on any balance due. You can avoid some of the penalty by estimating your total balance due and sending in a good chunk of that amount when you file the extension.

About the Author

Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.

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