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How does the IRS determine tax penalties?

On Behalf of | Jul 13, 2021 | Internal Revenue Service

It’s no surprise to learn that the IRS levies both late payment penalties and interest on unpaid tax obligations. Unfortunately, a quick visit to the IRS website might leave you more confused than when you began.

Below, we’ll provide a quick and simple summary of how the IRS calculates penalties for deficient tax obligations.

Tax penalties

The IRS may levy a penalty in two circumstances.

First, if you owe tax and don’t file the required return on time, penalties may apply, and are levied on both the tax due and the interest on the past due tax. Late filing penalties are usually around 5% of the tax owed for each month that passes before the return is filed. 

Second, if you file the required return on time, but fail to pay the full tax obligation. In these cases, the penalty is usually assessed as 0.5% (one half of a percent) of the tax owed per month the tax went unpaid.

Remember, these penalties are calculated monthly— this means that it doesn’t take long for compounding interest to result in substantial tax penalties unless you address your tax situation immediately.


In addition to these penalties, the IRS may also levy interest on deficient taxes. This can apply in a variety of situations, and in general, is calculated based on the time period spanning the original tax due date and the actual date of payment.

The interest amount can vary, and is updated quarterly by the IRS.

Unlike penalties, however, tax interest is calculated daily. Again, this compounding feature can result in substantial additional costs to the taxpayer if tax obligations are not addressed as soon as possible.

Can I do anything to alleviate penalties and/or interest?

The good news is that, yes, in many circumstances, your tax attorney may be able to secure what’s called an abatement to reduce or eliminate the actual penalties levied on your account. In general, if your attorney can show evidence of an extenuating circumstance that led to the late filing and/or payment, the IRS may show mercy.

The downside? Pursuing an abatement means appealing to and communicating with the highly-bureaucratic Internal Revenue Service. Also, while we have had repeated success securing relief for past clients, the bar to securing abatement relief is still relatively high for many taxpayers.

This is why retaining a trusted tax attorney is an invaluable asset to resolving your tax issues. A tax attorney will know the best way to pursue relief, the most important evidence to gather and how to navigate the labyrinth of the federal tax system.


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