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Delinquency: Related Penalties

Updated: Sep 22, 2022

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Tax penalties can be incurred due to a taxpayer’s failure to take certain actions. These types of penalties include the failure of the taxpayer to file their return by the applicable due date, failure to pay tax liability, and failure to pay installments of estimated tax owed for the upcoming year. In order to avoid the penalties for failing to file a return, a taxpayer should file their tax return by April 15th. Corporations and other business entities are required to file their return by March 15th. The amount of penalty owed is calculated as five percent of the amount of tax owed. This penalty only applies to the first five months that a return is late and the maximum penalty is twenty-five percent.

However, this penalty can be increased to fifteen percent per month if the taxpayer’s failure to file is fraudulent. As a result, the penalty would cap at seventy-five percent. If a taxpayer fails to pay their amount of tax owed, then they can incur a penalty. It is important to note that an extension to file a return does not extend the time for the taxpayer to pay the tax.

It is rare that a taxpayer receives an extension of time to pay the tax. However, an extension to file the return will be treated as an extension to pay if: (1) at least 90 percent of the tax owed is paid on or before the tax return due date, and (2) the balance of the tax due is paid with the return. If the taxpayer files to pay the tax, then the penalty is 0.5 percent of the unpaid tax. The maximum amount for this penalty is twenty-five percent and it stops incurring once the IRS receives the full amount due. It is possible for a taxpayer to incur penalties for both failure to file and failure to pay. The third penalty occurs if the taxpayer does not make the required installments when due, or underpays the estimated tax. This penalty is calculated based on multiplying the current interest rate for underpayments by the amount of underpayment for the period.

By: Brooke Williams, Tax Senior at CROFT & FROST


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