Penalties and amounts are based on the type of mistake you make. Many are based on the percentage of the unpaid or underpaid tax. Some of the penalties are fixed while others are a percentage.
The IRS determines penalties based on the specific type of non-compliance, such as:
- Failure to file a return on time
- Failure to pay taxes owed
- Understating your tax liability
- Intentionally misreporting information (fraud)
Failure to file is 5% of unpaid tax per month or part of the month the return is late per month or , upto 25% with minimum 60 day late penalty. Failure to pay is 0.5% of unpaid tax per month or part of the month the return is late per month, also capped at 25%. But when both penalties apply, the combined penalty for the month is 5%.
Accuracy related penalty applies when you under pay your tax, and is generally 20% of the underpayment attributed to negligence, disregard of rules, or a substantial understatement of tax. A substantial understatement for individuals is when the amount is more than 10% of the correct tax or $5,000, whichever is greater. A higher penalty rate of 40% applies for gross valuation misstatements.
Underpayment penalty of estimated taxes applies if you did not pay enough taxes throughout the year. The interest is per quarter and the IRS has interest rates set for each quarter.
