David N. McCullough CPA PC

Financial, Tax, and Family Office Services

Penalties and Interest

IRS Penalties and interest – The Very Basics for Individual Taxpayers



Interest is the easiest.

For the past several years, the interest rate has been 3%, per annum, compounded daily, for both underpayments and overpayments.


There are three types of penalties most taxpayers will see:

  1. Underpayment of estimated tax
  2. Failure to file
  3. Failure to pay


Underpayment of estimated tax


The IRS wants you to have paid in at least 90% of your total tax (see line 63 on your 2015 Form 1040) during the tax year, either through withholding or estimated tax.

  • It is possible to have an underpayment of estimated tax even if all your income from a W-2. Payroll withholding tables are generally set up to generate a refund (it’s administratively a lot easier for the IRS to issue a refund check than it is to process your payment on April 15th) but the tables are limited by what you tell them- basically only your earnings rate at that job. If you have other income, large deductions, or other credits, the tables won’t work very well.
  • The general rule is “if you have withholding this year equal to your prior year’s total tax, you won’t owe an underpayment penalty.”
  • My suggested approach is to divide your total tax (see line 61) by the number of pay periods in a year, and work with your payroll department to have that much withheld each pay period. That encourages you to live within your means and avoid unpleasant surprises.


Failure to file penalties


Individual returns are due on April 15th. If you can’t file by then, file an extension (by April 15th) which gets you an additional six months to file. If you don’t file the return by then, the penalty is 5 percent, per month, of the taxes due, up to 25% of the tax due. So, if you owe $1000 for a tax year and don’t file the return, or an extension, until November, you’ll get hit with a $250.00 failure to file penalty. The IRS sums up the rules very neatly here: http://www.irs.gov/uac/Failure-to-File-or-Pay-Penalties:-Eight-Facts

I will sum up even more succinctly: File on time.


Failure to pay penalties


Tax is due on April 15th. If you don’t pay then, you are subject to a penalty of one-half-percent per month (up to a total of 25% of the tax due). Note that this is one-tenth of the failure to file penalty- so if you owe taxes, file the return by the due date, even if you can’t pay the tax.


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