We have prepared delinquent returns for many clients. When the client gets the tax bill, the client is astonished on the amount of penalties and interest charged. We usually tell clients that if you owe taxes from four years ago, you can double it to estimate how much is owed today.
Internal Revenue Code (IRC) Sections
IRC Sec. 6651(a)(1), the failure to file a tax return penalty is 5% per month not filed. The penalty cannot exceed 25%. It will take 5 months to reach the maximum penalty of 25%. If an annual tax return with a tax balance of $1,000 is more than 5 months late, the penalty will be $250 (1000 * 25%). There is no penalty if there is a refund.
IRC Sec. 6651(a)(2), the failure to pay the amount owed before the due date of the tax return is 0.5% per month not paid. The penalty cannot exceed 25%. It will take 50 months to reach the maximum penalty of 25%. If an annual tax return with a balance of $1,000 is paid 5 months late, the penalty is $25 (1000 * 2.5%). There is no penalty if there is a refund.
Interest is charged on both the tax and penalties owed.
IRC Sec. 6621(b), the interest rate is the Federal short-term rate plus 3%. For October 2012, the Federal short-term rate is 0.23%. Therefore, interest on taxes and penalties for October 2012 will be 3.23%.
Example Calculation
If a tax return is filed late with a balance owed, penalties are computed. Then interest is charged on both the tax and penalty owed from the date the tax return is due. Below is a calculation for 6 years of delinquent tax returns filed in October of 2012.
| Year | Tax | Penalties | Interest | Total |
| 2006 | 10,000.00 | 4,750.00 | 3,599.53 | 18,349.53 |
| 2007 | 20,000.00 | 9,500.00 | 4,854.57 | 34.354.57 |
| 2008 | 15,000.00 | 6,525.00 | 2,481.95 | 24,006.95 |
| 2009 | 30,000.00 | 11,250.00 | 3,328.39 | 44,578.39 |
| 2010 | 17,500.00 | 5,512.50 | 1,080.34 | 24,092.84 |
| 2011 | 12,000.00 | 3,060.00 | 214.82 | 15,274.82 |
| Total | 104,500.00 | 40,597.50 | 15,559.60 | 160,657.10 |
In this example, the taxpayer would have paid $104,500 in taxes over the last 6 years if the tax returns were timely filed and taxes paid. However, since the taxpayer filed the last 6 years of returns late without payment, the taxpayer will owe about $160,000. This is a 60% increase of taxes owed.
If you are this situation, then it’s time to stop worrying and get tax help from a local, trusted professional. Call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.