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Late Filing Penalties - Income Tax
First the good news. Most late filing penalties are calculated on the unpaid balance showed on the tax return. So, if you are late filing your tax return and you are due a refund, there are no penalties. Please see exceptions to this general rule below.
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If you did not file on time and owe tax, you may owe a penalty for failure to file unless you can show reasonable cause. The failure to file penalty is 5% for each month, or part of a month, that your return was late, but not more than 25%.
In addition to the late filing penalty, there is a late paying penalty. The failure to pay penalty is .5% per month. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. In other words, the late filing penalty becomes 4.5%.
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After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid. Thus, the total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100% of the unpaid tax.
And, by the way, the IRS also charges interest, compounded daily, on any unpaid tax from the due date of the return until the date of payment. To make matters worse, this interest is not deductible. The IRS interest rate for underpayments changes every three months and is currently 6% for April-June, 2005. For current interest rates, go to News Releases and Fact Sheets and find the most recent Internal Revenue release entitled Quarterly Interest Rates. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.
Exceptions to the no-tax-no-penalty rule. Certain tax returns are information returns and typically there is no income tax liability shown on these returns. However, late filing penalties apply to Partnership and Subchapter S Corporations. The late filing penalty is $25 per day for each partner or for each shareholder.
Income Tax |
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| ©2010 Michael Johnston, CPA. All Rights Reserved. |
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