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Frequently Asked Tax Questions And Answers
Keyword: Penalty for Underpayment 1.3 IRS Procedures: Amended Returns & Form 1040X
Will I have to pay any delinquency penalties when I file Form 1040X?
No late payment penalty will be due. If you owe tax, you can pay the tax
with the Form 1040X and be billed for any interest. If the bill is not paid
within 21 calendar days (10 business days if the amount equals or exceeds
$100,000), a late payment penalty will be due from the date of the bill unless
there is reasonable cause for the failure. If the original return was late,
the amount due based on any additional tax on Form 1040X may be subject to
the late filing penalty for the original return unless you have reasonable
cause for the failure.
References:
1.5 IRS Procedures: Collection Procedural Questions
What kind of penalties and interest will I be charged for paying
and filing my taxes late?
Interest, compounded daily, is charged on any unpaid tax from the due date
of the return until the date of payment. The interest rate is the federal
short-term rate plus 3 percent. That rate is determined every three months.
For current interest rates, go to News
Releases and Fact Sheets and find the most recent Internal Revenue release
entitled Quarterly Interest Rates.
In addition, if you filed on time but didn't pay on time, you'll generally
have to pay a late payment penalty of one-half of one percent of the tax owed
for each month, or part of a month, that the tax remains unpaid after the
due date, not exceeding 25 percent. However, you will not have to pay the
penalty if you can show reasonable cause for the failure. 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.
Beginning January 1, 2000, if you filed a timely return and are paying
your tax pursuant to an installment agreement, the penalty is one-quarter
of one percent for each month, or part of a month, that the installment agreement
is in effect.
If you did not file on time and owe tax, you may owe an additional penalty
for failure to file unless you can show reasonable cause. The combined penalty
is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part
of a month, that your return was late, up to 25%. The late filing penalty
applies to the net amount due, which is the tax shown on your return and any
additional tax found to be due, as reduced by any credits for withholding
and estimated tax and any timely payments made with the return. 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. Also, if your return was over 60 days late, the minimum failure-to-file
penalty is the smaller of $100 or 100% of the tax required to be shown on
the return.
Also, refer to Tax Topic 653, IRS Notices and Bills and Penalty
and Interest Charges.
References:
1.7 IRS Procedures: Extensions
If you don't owe any money, do you have to file a tax return? If
you are late filing, without an extension, and have a refund coming back,
how much are you penalized? How long can you make claim to that money?
Whether you have to file a tax return depends on your filing status, age,
and gross income. For more information refer to Publication 501, Exemptions,
Standard Deduction, and Filing Information. You are required to file
even if you are going to get a refund. Even if you are not required to file,
you need to file if you are due a refund from income tax withheld from your
pay, or you qualify for the earned income credit or the additional child tax
credit.
Late filing penalties are based on the amount owed. If you have a refund
coming there will be no penalty.
While you can file the original tax return at any time, the amount of any
refund cannot be more than any tax paid within the 3-year period (plus any
extension of time for filing your return) immediately before you filed the
claim. The time you file your claim may be based on the postmark date for
this purpose. Income tax withheld from wages and estimated income tax payments
(made before the due date without regard to extensions for the original return)
are considered paid on the due date.
References:
I'm expecting a refund, but I have not filed my return and the deadline
has passed. Will a late penalty be charged?
If there is a refund due to you, no penalty for late filing will be charged.
The penalty is based upon the unpaid taxes as of the due date of the return.
There is a deadline for claiming a refund. While you may file the original
tax return at any time, the amount of any refund cannot be more than any tax
paid within the 3-year period (plus any extension of time for filing your
return) immediately before you filed the claim (The time you file your claim
may be based on the postmark date for this purpose). Income tax withheld from
wages and estimated income tax payments (made before the due date without
regard to extensions of the original return) are considered paid on the due
date.
I've been told that payment of taxes can be deferred until August.
I've also been told that payment is due April 15th and the extension is just
for follow-up paperwork. Which is correct? Is it possible to file an extension
for payment of taxes due?
If you are unable to file your individual tax return by the due date, you
can get an automatic 4-month extension of time by filing Form 4868 (PDF), Application for Automatic Extension of Time to File for U.S.
Individual Income Tax Returns, before the due date, usually April 15.
By filing this form, you can avoid a late filing penalty. However, this extension
does not give you more time to pay the tax you owe. It is only an extension
of time to file your return. If you need an extension of time to file, you
need to estimate how much tax, if any, you'll owe, and include that payment
with your Form 4868. If you cannot pay the entire amount or a part of that
amount, please see the information above.
If you are a U.S. citizen, resident or a member of the armed forces, whose
home and main place of business or post of duty are outside the U.S. and Puerto
Rico on the return due date, you are allowed a two-month extension until June
15, to file your return and pay any tax due. If you use this automatic extension,
you must attach a statement to your return saying that your home and your
main place of business or post of duty are outside the U.S. and Puerto Rico
on the due date of your return. If you have a balance due on your return,
it will be subject to interest from the due date (usually April 15) until
you pay the tax.
References:
If I file for an extension, do I still have to send in any money
I think I might owe by the April 15th date, or can I wait until I know exactly
what I owe or don't owe and send it in by the extension due date?
If you need an extension of time to file, you need to estimate how much
tax, if any, you'll owe on Form 4868 (PDF), Application
for Automatic Extension of Time to File for U.S. Individual Income Tax Returns.
You do not have to pay the amount of the estimate in order to obtain the extension.
However, the extension does not give you more time to pay the tax you owe;
it is only an extension of time to file your return. If you owe any amount
of tax when you file your return, you will be charged interest on that unpaid
balance from the original due date (usually April 15) of the return. You will
also be charged a late payment penalty if the unpaid balance is more than
10 percent of your actual tax liability unless you have reasonable cause for
the failure to pay.
References:
I filed an extension in April and still owe the IRS. I want to pay
the money before the August deadline to file. Do I need to fill out a form
to send in with my check? Where do I send the check? What are the penalties,
interest due for not paying by April 15th?
Interest will be assessed from the due date of the return. When you file
your return, simply pay the amount due. The IRS will send a notice of the
interest due. You will also be charged a late payment penalty if the unpaid
balance is more than 10 percent of your actual tax liability unless you have
reasonable cause for the failure to pay.
References:
1.11 IRS Procedures: Notices & Letters
I received an IRS notice resulting from correspondence I sent regarding
a change to my return. The notice includes additional penalties and interest
charges. How are the penalties and interest figured?
Interest is charged on any unpaid tax from the due date of the return until
the date of payment. The interest rate is determined every three months and
is the federal short-term rate plus 3 percent. Interest is compounded daily.
If you paid the net amount of tax that was due based on the tax shown on the
return, and later determine that more tax should have been shown on the return,
you will incur a failure to pay penalty. Additionally, when IRS bills you
for any tax, penalty, or interest, if you do not pay the bill within 21 calendar
days (10 business days if the amount equals or exceeds $100,000), a late payment
penalty from the date of the bill unless you have reasonable cause for the
failure.
If you file on time but don't pay the net amount due based on the tax shown
on the return, you will generally have to pay a late payment penalty of one-half
of one percent of the tax owed for each month, or part of a month, that the
tax remains unpaid after the due date, up to 25 percent. However, you will
not have to pay the penalty if you can show reasonable cause for the failure.
References:
5.3 Pensions and Annuities: Distributions, Early Withdrawals, 10% Additional Tax
If we cash in a pension plan while in our thirties, when do we pay
the taxes and penalties?
Because our tax system is a pay-as-you-go system, you may need to make
an estimated tax payment by the due date for the quarter in which you received
the distribution. When calculating your tax liability to determine whether
you need to make an estimated tax payment, your total tax for the year should
include the amount of the 10 percent additional tax on early distributions
from qualified retirement plans unless any exception applies.
You would calculate the tax on Form 1040-ES (PDF), Estimated
Tax for Individuals, and any 10 percent additional tax on early distributions
from qualified retirement plans on Form 5329 (PDF), Additional
Taxes on Qualified Plans (including IRA's) and other tax-favored accounts.
References:
- Form 1040-ES (PDF), Estimated
Tax for Individuals
- Form 5329 (PDF), Additional
Taxes Attributable on Qualified Plans (Including IRA's) and other tax-favored
accounts
- Publication 505, Tax Withholding and Estimated Tax
- Tax Topic 451, Individual retirement arrangements
(IRAs)
- Tax Topic 558, Tax on early distributions from retirement
plans
9.1 Estimated Tax: Businesses
Estimated quarterly income taxes for a corporation were not paid. What is
the penalty amount? Is there any way to reduce the penalty?
If the corporation does not pay a required installment of estimated tax by its
due date, it may be subject to a penalty. The penalty is figured separately for each
installment due date. The corporation may owe a penalty for an earlier due date, even
if it paid enough tax later to make up the underpayment. This is true even if the
corporation is due a refund when its return is filed.
Use Form 2220 (PDF), Underpayment of Estimated Tax
by Corporations, to determine if a corporation is subject to the penalty for
underpayment of estimated tax and, if so, the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on the
following three factors:
The amount of the underpayment.
The period during which the underpayment was due and unpaid.
An interest rate that is published quarterly by the IRS in the Internal Revenue
Bulletin.
The penalty may be waived by IRS on a case-by-case basis if the failure to make
estimated payments was caused by a casualty, disaster, or other unusual circumstance.
For more information, refer to Publication 542 , Corporations and
the
Instructions for Form 2220
References:
9.3 Estimated Tax: Individuals
What can I do to make sure I will not owe the IRS on my 2004 income tax
return?
You can either increase the amount of income tax withheld from your pay or make
estimated tax payments for 2004. You may change the amount of income tax withheld
from your pay by filing a new Form W-4 (PDF), Employee's
Withholding Allowance Certificate. Form 1040-ES (PDF), Estimated
Tax for Individuals, has a worksheet to see if you need to make estimated tax
payments. For more details, refer to Tax Topic 355, Estimated Tax, or Publication 505, Tax Withholding and Estimated Tax.
References:
9.5 Estimated Tax: Penalty Questions
What is the minimum amount of estimated tax that I am required to pay without
incurring any penalty or interest charges?
In general, you may owe a penalty for 2003 if the total of your withholding and
estimated tax payments did not equal at least the smaller of:
90% of your 2003 tax (current year tax), or
100% of your 2002 tax (prior year tax). (Your 2002 tax return must cover a 12-month
period.)
Your 2003 tax, for this purpose, is your Total tax for 2003. There are special
rules for farmers and fishermen, and for certain higher income taxpayers.
Generally, you do not have to pay an underpayment penalty if either of the following
conditions apply:
Your total tax is less than $1,000, (less withholding and credits) or
You had no tax liability last year.
Farmers and fishermen. If at least two-thirds of your gross
income for 2002 or 2003 is from farming or fishing, you are required to make one installment
equal to 66 2 /3% of your 2003 tax (current year tax).
Higher income taxpayers. If less than two-thirds of your gross income for 2003
or 2002 is from farming or fishing and your adjusted gross income (AGI) for 2002 was
more than $150,000 ($75,000 if your filing status is married filing a separate return
in 2002), substitute 110% for 100% in (2) above.
References:
What is meant by "no tax liability" in the exceptions to the estimated tax
penalty?
You do not have to pay estimated tax for 2003 if you meet all three of the following
conditions.
1. You had no tax liability for 2002.
2. You were a U.S. citizen or resident for the whole year.
3. Your 2002 tax year covered a 12-month period.
You had no tax liability for 2002 if your total tax was zero or you did not have
to file an income tax return.
Total tax for 2002. Your 2002 total tax on Form 1040 (PDF) is the amount on line 61 reduced by the total of the amounts on line 57,
64, and 66, any credit from Form 4136 (PDF) included on
line 68, any recapture of a federal mortgage subsidy and any uncollected social security,
Medicare, or railroad retirement tax included on line 61, and any tax on excess contributions
to IRAs and medical savings accounts, and on excess accumulations in qualified retirement
plans from Forms 5329 included on line 58.
On Form 1040A (PDF) , it is line 38 reduced by the amount
on line 41 and 42. On Form 1040EZ (PDF) , it is line
10 reduced by line 8.
For additional information on this topic refer to Form 1040-ES (PDF), Estimated Tax for Individuals , and Publication 505, Tax
Withholding and Estimated Tax .
References:
I was a student in 2002 and had no income. In 2003, I started working and
did not have enough tax withheld. Will I owe a penalty because I did not make estimated
tax payments?
You will not have to pay a penalty for 2003 if you did not owe tax for 2002. For
additional information on the penalty for underpayment of estimated tax, refer to Tax Topic 306 , Penalty for Underpayment of Estimated Tax. For information
on how to increase the amount of tax withheld by your employer, refer to Tax Topic 753, Form W-4 (PDF) , Employee's Withholding Allowance Certificate .
For information on estimated tax requirements, refer to Tax Topic 355, Estimated
Tax or Publication 505, Tax Withholding and Estimated Tax .
References:
I was late mailing my estimated tax payment. To minimize the penalty, how
do I compute the interest rate and late payment charges in order to send an additional
check to the IRS as soon as possible?
The failure to pay estimated tax penalty is based upon the number of days that
the payment is late and the current interest rate. Therefore, we cannot give a percentage
that applies for all cases. To compute the amount of the estimated tax penalty you
will need to refer to Publication 505, Tax Withholding and Estimated Tax and
Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts for directions on computing the penalty.
Since the computations can get rather complicated, you may want to just send in the
estimated tax payment and wait for a bill from us for the penalty.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts
Why should I owe a penalty for failing to pay estimated taxes when I received
a refund for the prior year?
Since the estimated tax penalty is based upon your prior or current year income
tax liability (not withholding or estimated tax payments), you may be subject to the
penalty even if you had a refund for your prior year return.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts
17.1 Individual Retirement Arrangements (IRAs): Distributions, Early Withdrawals, 10% Additional Tax
If we cash in an IRA account while in our thirties, when do we pay the taxes
and penalties?
Because our tax system is a pay-as-you-go system, you may need to make an estimated
tax payment by the due date for the quarter in which you received the distribution.
When calculating your tax liability to determine whether you need to make an estimated
tax payment, your total tax for the year should include the amount of the additional
10 percent tax on early distributions from qualified retirement plans unless any exception
applies.
You would calculate the tax on Form 1040-ES (PDF), Estimated
Tax for Individuals, and any 10 percent additional tax on early distributions
from qualified retirement plans on Form 5329 (PDF), Additional
Taxes On Qualified Plans (Including IRA's) and Other Tax-Favored Accounts. Any
10 percent additional tax would go on Form 1040ES line 12 "other taxes," when completing
the worksheet.
References:
- Form 1040-ES (PDF), Estimated Tax for
Individuals
- Form 5329 (PDF), Additional Taxes On
Qualified Plans (Including IRA's) and Other Tax-Favored Accounts
- Publication 505, Tax Withholding and Estimated Tax
- Tax Topic 451, Individual Retirement Arrangements (IRAs)
- Tax Topic 557, Tax on Early Distribution from Traditional
and Roth IRA's.
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