GLOBAL EXECUTIVE MANAGEMENT SOLUTIONS

When filing your tax return in October, it is important to keep in mind that the IRS will assess penalties under certain circumstances. The penalties are in place to ensure that all taxpayers pay their taxes on time. The primary two penalties are the Failure to File penalty and the Failure to Pay penalty.

(Note: If there is an underpayment as the result of fraud, you may be subject to a civil fraud penalty. In certain cases, you may be subject to criminal prosecution.)

Interest – 1% per month (or part of the month) on any unpaid tax from the due date until paid in full. This translates to a 12% interest rate.

Underpayment Penalty – In general, you may owe a penalty of 3% or 4% for current year tax return if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:

• 90% of your current year tax, or
• 100% of your prior year tax. (Your prior year tax return must cover a 12-month period.)

Failure-to-pay penalty – This penalty is assessed when you have underpaid your taxes by the original due date of your tax return (April 15).

• Penalty amount – ½ of 1% per month (or part of the month) of your unpaid balance due. Like the failure to file penalty, this penalty cannot be more than 25% of your unpaid tax.

If you can show good reason (reasonable cause in tax-speak) for not paying the tax on time, the IRS will waive the penalties, however, there are restrictions on what the IRS will say is reasonable.

Failure-to-file penalty – This penalty is assessed when your personal tax return is not filed by the original due date (April 15) or the extended due date (October 15), if you filed for an extension of time to file your return by the original due date.

• Penalty amount – 5% per month (or part of the month) of the unpaid balance due. This penalty cannot be more than 25% of your unpaid tax, but it is reduced by the failure-to-pay penalty (see below) for any month both penalties apply. However, if your return is more than 60 days late, the penalty will not be less than $100 or 100% of the tax balance, whichever is less.

Interest – 1% per month (or part of the month) on any unpaid tax from the due date until paid in full. This translates to a 12% interest rate for a penalty/interest comparable to the IRS Underpayment Penalty.

Underpayment Penalty – In general, you may owe a penalty of 3% or 4% for current year tax return if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:

• 90% of your current year tax, or
• 100% of your prior year tax. (Your prior year tax return must cover a 12-month period.)

Late Payment Penalty – 1/2 of 1 percent of the tax due per month (or part of the month), up to 25 percent.

Late Filing Penalty – Penalty for late filing of return 5 percent of the tax not paid by the original due date for each month or fractional part thereof, up to 25 percent.

Note: The combined total of the penalty for late filing of return and penalty for failure to pay tax shown on a return cannot exceed 25 percent of the tax not paid by the original due date.

Final note: often the penalties can be abated by the tax authorities. However, the Interest is NEVER abated.

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