How Does the IRS Calculate Penalties and Interest?
Late payment of employment taxes will trigger penalties and interest charges to the taxpayer. These notices, particularly from the IRS, are next to impossible to decipher. Here is a quick primer on IRS penalty and interest calculations.
Statue of Limitations
There is NO statue of limitations on the failure to file and report payroll taxes (Social Security, Medicare, Unemployment, withheld income taxes). There also is no statue of limitations on assessment of tax, penalties and interest when a false tax return is filed. Household employment taxes are remitted with the employer's personal income tax return. Any household employer who did not pay these taxes has de jure submitted a false tax return.
-- Late Filing Penalties
If you owe tax and don't file on time, according to IRS regulations, penalties are assessed and added to your bill. Penalties are in addition to BOTH the tax due and the interest on the past due tax. The total late–filing penalty is usually 5% of the tax owed for each month, or part of a month, that your return is late up to five months (25%). If your return is over 60 days late, the minimum penalty for late filing is the smaller of $100 or 100 percent of the tax owed.
-- Late Payment Penalties
If you file on time but don't pay all amounts due on time, you'll generally have to pay a late payment penalty of one–half of one percent (0.5%) of the actual tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full. There is no maximum limit to the failure-to-pay penalty.
The IRS will charge interest on late or unpaid taxes, regardless of cause. The period covered always begins with the due date of the return, and ends with the receipt of payment by the IRS. You may incur interest expenses for late filing, or simply for making a mathematical error on your tax return.
Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate on unpaid Federal tax is determined and posted every three months. It is the federal short–term interest rate plus 3 percent. Interest is compounded daily.
|Jan. 1, 1992--Mar. 31, 1992||8%|
|Apr. 1, 1992--Sep. 30, 1992||7%|
|Oct. 1, 1992--Jun. 30, 1994||6%|
|Jul. 1, 1994--Sep. 30, 1994||7%|
|Oct. 1, 1994--Mar. 30, 1995||8%|
|Apr. 1, 1995--Jun. 30, 1995||9%|
|Jul. 1, 1995--Jun. 30, 1996||8%|
|Jul. 1, 1996--Mar. 31, 1998||8%|
|Apr. 1, 1998--Mar. 31, 1999||7%|
|Apr. 1, 1999--Dec. 31, 1999||8%|
|Jan. 1, 2000--Mar. 31, 2000||8%|
|Apr. 1, 2000--Mar. 31, 2001||9%|
|Apr. 1, 2001--Jun. 30, 2001||8%|
|Jul. 1, 2001--Dec. 31, 2001||7%|
|Jan. 1, 2002--Dec. 31, 2002||6%|
|Jan. 1, 2003--Sep. 30, 2003||5%|
|Oct. 1, 2003--Mar. 31, 2004||4%|
|Apr. 1, 2004--Jun. 30, 2004||5%|
|Jul. 1, 2004--Sep. 30, 2004||4%|
|Oct. 1, 2005--Mar. 30, 2005||5%|
|Apr. 1, 2005--Sep. 30, 2005||6%|
|Oct. 1, 2005--Dec. 31, 2005||7%|
|Jan.. 1, 2006--Mar. 31, 2006||7%|
|Apr. 1, 2006--Jun. 30, 2006||7%|
|July 1, 2006--Dec. 31, 2007||8%|
|Jan. 1, 2008--Mar. 31, 2008||7%|
|Apr. 1, 2008--Jun. 30, 2008||6%|
|July 1, 2008--Sept. 30, 2008||5%|
|Oct. 1, 2008--Dec. 31, 2008||6%|
|Jan. 1, 2009--Mar. 31, 2009||5%|
|Apr. 1, 2009--Dec. 31, 2010||4%|
|Jan. 1, 2011 -- June 30, 2013||3%|
Updated March 2013
Abatement of Penalties and Interest
The IRS will require that penalties and interest be paid in full before any abatement determination is made. Once you pay the bill, the 'meter' stops and you will not have additional interest charges accruing.
As a general rule of thumb, you may request an abatement of penalty if you show cause. Interest on late tax payments may not be abated except in extraordinary circumstances. Interest abatement almost always requires that the taxpayer prove an undue delay by an Internal Revenue Service staff member is the cause, in part, of the interest.
A taxpayer who voluntarily steps forward and corrects a deficiency in a previously filed return (NOT DISCOVERED IN AN AUDIT!) is often successful in requesting penalty abatement.
To request an abatement of penalty, write to the IRS office that issued the bill within the time frame provided by the IRS. Be certain to clearly and concisely describe the cause and provide any supporting documentation you might have. We have had many clients be successful in having late payment penalties abated with a statement as follows:
"A bookkeeping error resulted in an under reporting of wages for the [PERIOD]. I (We) immediately and voluntarily corrected the record and paid the taxes due once the error was discovered. I (We) recognize that interest on the late taxes is due. However, I (We) respectfully request that the late filing penalty be abated."
We have found that the IRS adjustment process takes 30 - 60 days from when the abatement request is made.