If you estimate your taxes and estimate low, or pay a lower of
higher amount than you are required to pay, you'll now pay more in
Revenue Service (IRS) has announced that interest rates for the
calendar quarter beginning April 1, 2011, will increase by one
percentage point. The rates will be:
- four (4) percent for overpayments (three (3) percent in the
case of a corporation);
- four (4) percent for underpayments;
- six (6) percent for large corporate underpayments; and
- one and one-half (1.5) percent for the portion of a corporate
overpayment exceeding $10,000.
Under the Internal Revenue Code, the rate of interest is
determined on a quarterly basis. For taxpayers other than
corporations, the overpayment and underpayment rate is the federal
short-term rate plus three percentage points. (Read consumer
complaints about tax preparation companies).
Generally, in the case of a corporation, the underpayment rate
is the federal short-term rate plus three percentage points and the
overpayment rate is the federal short-term rate plus two percentage
points. The rate for large corporate underpayments is the
federal short-term rate plus three percentage points.
The rate on the portion of a corporate overpayment of tax
exceeding $10,000 for a taxable period is the federal short-term
rate plus one-half (0.5) of a percentage point. Additionally,
the rate for determining the addition to tax for failure to pay
estimated tax for the first 15 days in April 2011 is the four
percent rate that applied to underpayments of tax during the first
calendar quarter in 2011.
The interest rates are computed from the federal short-term rate
during January 2011 to take effect February 1, 2011, based on daily
In addition to paying interest, you usually will face a
financial penalty for underpaying, or not paying your taxes on
file. If fraud is involved, the penalties are more than financial
and involve criminal prosecution. Penalties are generally payable
upon notice and demand and are generally assessed, collected and
paid in the same manner as taxes.
Estimated Tax-Related Penalties
Employees have taxes withheld from their paychecks by their
employer. When you have income that is not subject to withholding
you may have to make estimated tax payments during the
This includes income from self-employment, interest, dividends,
alimony, rent, gains from the sale of assets, prizes and awards.
You also may have to pay estimated tax if the amount being withheld
from your salary, pension, or other income is not enough to pay
your tax liability.
Estimated tax payments are used to pay income tax and
self-employment tax, as well as other taxes and amounts reported on
your tax return. If you do not pay enough through withholding or
estimated tax payments, you may have to pay a penalty. If you do
not pay enough by the due date of each payment period you may be
charged a penalty even if you are due a refund when you file your
Penalties for filing or paying taxes late
The most common penalties are for filing late or paying taxes
late. If you do not file your return by the due date (including
extensions), you may have to pay a failure-to-file penalty. The
penalty is usually five percent for each month or part of a month
that a return is late --but not more than 25 percent. The penalty
is based on the tax not paid by the due date (without regard to
If you file your return more than 60 days after the due date,
the minimum penalty is $100 or, if less, 100 percent of the tax on
You will have to pay a failure-to-pay penalty of one-half of one
percent (0.5 percent) of your unpaid taxes for each month, or part
of a month, after the due date that the tax is not paid. This
penalty does not apply during the automatic six-month extension of
time to file period if you paid at least 90 percent of your actual
tax liability on or before the original due date of your return and
pay the balance when you file the return.
The failure-to-pay penalty rate increases to a full one percent
per month for any tax that remains unpaid the day after a demand
for immediate payment is issued, or 10 days after notice of intent
to levy certain assets is issued.
For taxpayers who filed on time, the failure-to-pay penalty rate
is reduced to one-quarter of one percent (0.25 percent) per month
during any month in which the taxpayer has a valid installment
agreement in force.
For any month both the penalty for filing late and the penalty
for paying late apply, the penalty for filing late is reduced by
the penalty for paying late for that month, unless the minimum
penalty for filing late is charged.
Accuracy related penalties
The two most common accuracy related penalties are the
"substantial understatement" penalty and the "negligence or
disregard of the rules or regulations" penalty. These penalties are
calculated as a flat 20 percent of the net understatement of
Understatement of tax means the tax shown on your return is less
than the correct tax. The understatement is substantial if it is
more than the larger of 10 percent of the correct tax or $5,000 for
individuals. For corporations, the understatement is considered
substantial if the tax shown on your return exceeds the lesser of
10 percent (or if greater, $10,000) or $10,000,000.
Penalty for negligence and disregard of the rules and
"Negligence" includes (but is not limited to) any failure
- make a reasonable attempt to comply with the internal revenue
- exercise ordinary and reasonable care in preparation of a tax
- keep adequate books and records or to substantiate items
This penalty may be asserted if you carelessly, recklessly or
intentionally disregard IRS rules and regulations -- by taking a
position on your return with little or no effort to determine
whether the position is correct or knowingly taking a position that
is incorrect. You will not have to pay a negligence penalty if
there was a reasonable cause for a position you took and you acted
in good faith.
Civil fraud penalty
If there is any underpayment of tax on your return due to fraud,
a penalty of 75 percent of the underpayment due to fraud will be
added to your tax. The fraud penalty on a joint return does not
apply to a spouse unless some part of the underpayment is due to
the fraud of that spouse. Negligence or ignorance of the law does
not constitute fraud.
Typically, IRS examiners who find strong evidence of fraud will
refer the case to the Internal Revenue Service Criminal
Investigation Division for possible criminal prosecution. Keep in
mind that both civil sanctions and criminal prosecution may be
Frivolous tax return penalty
You may have to pay a penalty of $5,000 if you file a frivolous
tax return or other frivolous submissions. If you jointly file a
frivolous tax return with your spouse, both you and your spouse
each may have to pay a penalty of $5,000. A frivolous tax return is
one that does not include enough information to figure the correct
tax or that contains information clearly showing that the tax you
reported is substantially incorrect.
You will have to pay the penalty if you filed this kind of
return or submission based on a frivolous position or a desire to
delay or interfere with the administration of federal tax laws.
This includes altering or striking out the preprinted language
above the space provided for your signature, This penalty is added
to any other penalty provided by law.
Penalty for bounced checks
If you write a check to pay your taxes, make sure there are
funds available to cover it. This is a check you don't want to
bounce. If the check bounces, the IRS may impose a penalty. The
penalty is either two percent of the amount of the check unless the
check is under $1,250, in which case the penalty is the amount of
the check or $25, whichever is less.
"The bottom line is that you must report all your income, file
your return and pay your tax by the due date to avoid interest and
penalty charges," the IRS says.
It pays to make sure the bottom line on your tax form is correct, and that you pay on time....