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How Is IRS Interest Calculated?

How Interest is Determined

When you’re late filing or paying your employment taxes to the IRS, penalties and interest charges will be will be triggered and assessed. Navigating the waters of IRS tax code can be an extremely tricky proposition – thankfully, we have compiled a helpful guide to understanding how the IRS calculates interest. Keep reading to find out more.

Late Filing/Failure to File Penalties

Late filing penalties are assessed on those who tax but did not file on time. These are also known as “Failure to File.” According to IRS regulations, the penalties are assessed and added to your tax bill.  It should be noted that any assessed penalties are in addition to the tax originally due, as well as the interest on the past-due tax. Penalties for late filings are generally 5% of the owed bill for each month, up to five months (or, 25%). If your tax return is over 60 days late, the minimum penalty assessed is the lesser amount of either $100 or 100% of the tax owed.

Late Payment/Failure to Pay Penalties

Late payment (also known as “Failure to Pay” penalties) are assessed on those who do not pay the full amount of tax owed on time. The interest penalty generally assessed for late payment is .5% of the tax owed for each month that remains unpaid from the due date – until the entire tax bill is paid. There is no maximum limit to these penalties.

Interest Charges

The Internal Revenue Service will charge interest on all unpaid or late taxes, no matter the reason for the delinquency. The period of the penalty charge will always begin on the original due date of the taxpayer’s return and will end with the receipt of payment by the IRS. Generally speaking, any interest charged by the IRS for unpaid tax is determined based upon the federal short-term interest rate, plus 3%. In addition, any interest will be compounded daily. As of April 2018, the interest rate is 5%.

Penalty Relief

The good news is that the IRS does allow for relief from penalties, providing the taxpayer in arrears has tried to comply but was unable to meet their tax obligations due to circumstances beyond their control. Unfortunately, there is no relief available from interest penalties.

Failing to file your federal tax returns – even for multiple years- is more common than you think. Penalties and interest can grossly inflate your liabilities and the results can be disastrous for you or your company.

If you are facing penalties from the IRS, you need an experienced tax law firm who is willing to fight for you. At Ayar Law, we represent people and business with state and federal tax problems that require creative solutions. We focus entirely on tax problem resolutions and specialize in giving our clients a fresh start. We strive to get you the best solution for your individual situation. So, if you’re having tax troubles call Ayar Law today at (248) 262-3340 for a free, no-obligation consultation.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.