IRS Underpayment Penalties and Tax Interest Rates
Failing To Pay Taxes In Full or Paying Taxes Late
If you did not pay your taxes in full by the due date, there will be interest charged on the remaining balance as well as a small underpayment penalty (.5% per month typically). This is also called the Failure to Pay Penalty. If you get an extension to pay your taxes you will most likely incur this underpayment penalty and interest. This interest varies depending on whether you are a corporation, individual taxpayer, and how much you owe (which is discussed in detail below).
IRS Underpayment Interest Rates By Quarter
|Q4 18: 10/1/18-12/31/18|
|Q3 18: 7/1/18-9/30/18|
|Q2 18: 4/1/18-6/30/18|
|Q1 18: 1/1/18-3/31/18|
|Q4 17: 10/1/17-12/31/17|
|Q3 17: 7/1/17-9/30/17|
|Q2 17: 4/1/17-6/30/17|
|Q1 17: 1/1/12-3/31/17|
|Q4 16: 10/1/16-12/31/16|
|Q3 16: 7/1/16-9/30/16|
|Q2 16: 4/1/16-6/30/16|
|Q1 16: 1/1/16-3/31/16|
|Q4 15: 10/1/15-12/31/15|
|Q3 15: 7/1/15-9/30/15|
|Q2 15: 4/1/15-6/30/15|
|Q1 15: 1/1/15-3/31/15|
Note from 2012 to 2015, the rates stayed at 3%.
Penalty for Underpayment of Estimated Taxes – Failure to Pay On Time
This is a another type of underpayment penalty. Taxpayers many times are required to make estimated IRS tax payments for income earned on a quarterly basis (4/15, 6/15, 9/15, and 1/15). If you are a W-2 employee, your employer typically withholds and sends your taxes to the IRS for you. However, if you are self-employed, or have a side business as a W-2 employee, you could be responsible for estimated quarterly payments. If you fail to make these payments, an underpayment penalty is incurred. This penalty is calculated quarterly with an interest penalty applied to the underpayments. The charge accrues until the amount is paid or till the due date of the return (whichever comes first). In order to avoid this penalty, you can pay 90% of your total tax liabilities on your tax return, or 100% (110% percent if your AGI was more than $150k) of the taxes paid last year (whichever is less). In most cases, if you underpaid by less than $1k (after deducting with-holdings and credits) you will avoid this penalty.* To calculate any underpayment use Form 2210, Underpayment of Estimated Tax By Individuals. With many penalties, realize you can abate them or eliminate them in many cases if you can prove reasonable cause. Also note, that this penalty is not tax deductible.
*These calculations change if you are a fisherman or farmer so speak with a tax pro or call the IRS. If were not a US citizen the whole year, had no tax liabilities in 2012, and your 2012 tax year was a 12-month period, you normally do not have to pay estimated taxes.
IRS Interest Rates – How They Are Set and Determined
The IRS (Secretary rounds to the nearest percent) typically sets quarterly interest rates a few weeks before the start of a quarter. These interest rates serve to penalize those who do not pay their taxes or if you fail to make estimated payments. Furthermore, the IRS looks at it as if they are giving you a loan in a way because you owe them.
Determining an IRS Interest Rates for Non Corporate Entities
Underpayment interest rates are determined by the federal short term rate plus 3% for taxpayers. You can find historical federal interest rates at the tax almanac.
Determining an IRS Interest Rate As Small Corporate Payment (under $100k)
Generally, with a small corporation you take the federal short term rate plus 3%. For corporate underpayment interest rates under 100k, explore this link.
Determining IRS Interest Rate for Large Corporation or Payment
Generally, if you are a large corporation, and owe over 100k, you add the short term federal interest rate (rounded to zero) and add 5%. As a result, for a large corporation who owes over $100k, the interest rate would be 5%.
If you cannot make payments in full or haven’t, still file a tax return. If April 15th is approaching, and you believe you will need more time, request a tax return filing extension (in order to prevent a failure to file penalty). Realize, with a filing extension, you still need to pay what you can, but you will reduce the total amount you owe if you are granted the extension because you avoid any unfiled tax return penalty which is steep (5% per month up to 25% total of tax balance). Moreover, if you cannot pay the full amount you owe in taxes, you can always request an IRS Installment agreement which will cut the failure to pay penalty by 50%. If you owe money for taxes in the past, or from last year, use the contract form on the right for a free consultation and quote for guidance on your options at no charge and with no obligation to use the services.
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IRS Underpayment Help & Info
Failure to File Tax Penalty
Understand how to calculate the penalty for not filing your taxes. Understand what the maximum is and what happens if fraud or negligence is involved.
Failure to Pay Tax Penalty
The penalty for not paying taxes or underpaying taxes ranges from 1/4% to 1% . Understand what rate you will be charged and if you can remove the penalties.
IRS Late Payment Penalty
The IRS charges penalties if you don’t pay on time. Penalties are determined by filing status and amount not paid. Understand the different late penalties.
Penalty for Filing Taxes Late
Penalties for filing a tax return late or not filing a tax return vary depending upon your situation. Q&A about various situations and the tax penalties (if any) that are associated with them.
Eliminate penalties and interest if you have legitimate reason for falling behind and not paying back taxes owed on time.
Can You Remove IRS Penalties?
Yes you can remove IRS penalties. Find out what is required to eliminate penalties owed to the IRS.
Tax Abatement Help
Do you need help abating tax penalties? Our Tax Team remove IRS tax penalties owed through penalty abatement. See if you qualify to have penalties removed.
IRS Tax Penalties and Interest
General information on IRS penalties. Understand what the common IRS penalties are and what can be done in order to reduce penalties owed.
Setting up a payment plan with the IRS can sometimes be the easiest solution to dealing with back taxes. See what payment plan fits your situation the best.
Request an IRS Filing Extension
If you just need more time to pay and want to delay the IRS collection system you can easily get extensions.
IRS Penalty Abatement Letter
In order to abate tax penalties you must include a letter to the IRS to support your reason. Here is an example of what can be included in your letter.