IRS Interest and Penalties

IRS interest and penalties can seem like a never ending spin cycle taking you for one more spin every time you think your cycle is over. And, the entire debacle stems from unpaid tax balances due. If taxes are paid up timely and sufficiently, then it is very unlikely the IRS will be eager to chase down taxpayers to get them to file their unfiled tax returns just to issue them a refund.

Having said that, one of the most costly penalties is the Failure to file penalty but it is the most evitable penalty also. The failure to file penalty is assessed whenever taxpayers fail to file their taxes by the due date or extension deadline; accruing at 5% per month. In a short five month period, the failure to file penalty easily peaks at a whopping 25% of taxes owed. This is why I always adjure taxpayers to file their taxes on time even if they may have a tax balance due. If a tax balance is due today, it will be due tomorrow, or whenever that tax return is eventually filed. Now, let’s take a look at a few additional penalties and associated interest that are now compounded on top of an unnecessary failure to file penalty.

Failure to pay penalty – whenever taxpayers fail to pay their taxes due by the original due date, they will incur a failure to pay penalty; an extension to file taxes does not grant an extension to pay taxes. The failure to pay penalty also peaks at 25% but it accrues at a much slower pace of 0.5% per month; that’s 50 years before it peaks at 25%.

Failure to pay proper estimated taxes penalty – whenever taxpayers are expecting to have taxes due in excess of $1,000, they are required to make estimated tax payments throughout the tax year to cover their tax liability. This is why as an employee taxes are withheld from your paychecks throughout the year.

This is also why it is important for the self-employeds, contractors, and other small business owners to file their quarterly estimated tax returns (and make the appropriate payments) every quarter. Logically speaking, it is also much better tax planning to pay a little at a time throughout the year than to pay a massive tax liability all at once at the end of the year.

Accuracy-related penalty – an accuracy-related penalty may be assessed in the event that taxpayers’ taxes are prepared incorrectly due to a math error, incompetence, negligence, or simply substantially understating their taxes due; the IRS may charge a 20% penalty. The 20% penalty is levied on the unpaid taxes directly related to the inaccuracy infraction.

Interest – and then we have good ole interest. What makes this debacle even more overwhelming is that so far we have only looked at (1) the unpaid tax balance due and (2) the penalties that may be charged; which is calculated based on the unpaid tax balance. Now, we have (3) interest – which is calculated based on the unpaid tax balance, the penalties, and any accumulated interest; that’s three distinguishable amounts lumped together and interest is charged on that lump sum daily. This is an example in reference to the term “interest compounded daily”.

In my book I wrote a few years ago, Money and Finance – What You Need to Know, I illustrated a few examples of calculating interest on an amount being compounded at different intervals. Those illustrations will bring the magnitude of compounding interest daily into a better perspective, front and center; it’s mind baffling.

In conclusion, if you can avoid IRS unpaid tax balances, interest, and penalties, then do your best and avoid them. The IRS also understands that sometimes uncertain and life changing events happen; when these events occur you may be able to qualify for some #IRSdebtrelief. Contact us here at Sanz Virtual Enterprise and we’ll help you SaVE Yourself Some Money.

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