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How Does The IRS Calculate Penalties And Interests?

1. Interest

The interest rate was just raised to 8% for the 4th quarter of 2023 for all balances with the IRS so we start at 8%.

You can check the following link for more information:

2. Failure to File Penalty

Is assessed when a tax return is not filed timely. This penalty accrues at 4.5%/month until the return is secured by the IRS.

3. Failure to Pay Penalty

Varies by a taxpayers status of their taxes with the IRS.

  1. If in an Installment Agreement – 0.25% added monthly.
  2. If not in an Installment Agreement – 0.5%
  3. If a Notice of Intent to Levy has been sent to the taxpayer – 1% monthly.

This penalty continues to accrue monthly until 25% of the total original tax has been assessed. For more information, see: https://www.irs.gov/pub/irs-pdf/n433.pdf

Summary

1. Taxpayer filed timely but owes and is on an Installment Agreement (IA), they will currently pay 8% + 0.25% a month until the 25% threshold is met. Possible Total P&I – 33% of original tax balance

2. Taxpayer timely filed, no IA – 8% + 0.5% until 25%. Possible Total P&I – 33%

3. Taxpayer timely filed, no IA with Notice of Levy (NOIL) – 8% + 0.5% until 25%. Possible Total P&I – 33%

4. Taxpayer did NOT file, no IA with NOIL – 8% + 0.5% until 25% + 4.5% with no limit. Possible Total P&I – 37.5% or higher of original balance

In short – it always pays to file on tax returns on time but the total penalties and interest that can accumulate on a case starts at 8% and can be over 37.5%. The rate of increase just accrues much slower in a Installment Agreement and faster in Collections.


Takeaway – it makes a lot of sense to file your tax returns timely and to setup a Resolution that fits your needs as soon as possible.

Book a free consultation with a Guardian Tax Professional today to get clear answers to your unique situation.

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