Yes, the penalties for tax mistakes are often based on a percentage of the underpaid tax, but it's not the only factor. The IRS uses these percentages to decide the penalty amount, and the rate depends on the type of mistake you made. https://www.irs.gov/payments/penalties
Accuracy-Related Penalty (most common)
- Rate: 20% of the underpaid tax due to negligence, substantial understatement, or disregard of rules.
Fraud Penalty
- Rate: Up to 75% of the underpaid tax if fraud is proven. This is reserved for cases where there is clear intent to deceive the IRS.
The IRS calculates interest on unpaid taxes starting from the original due date of the tax return, regardless of whether you filed an extension. This means that even if you received an extension to file, interest on any unpaid taxes starts accruing on the original due date, typically April 15.
The interest rate the IRS uses is tied to the federal short-term interest rate, which is determined quarterly. To this short-term rate, the IRS adds an additional 3%.
The IRS also considers whether you have a history of compliance and if there was a "reasonable cause" for the mistake. If you can show you had a good reason for the error (like a natural disaster, serious illness, or an inability to get records), the IRS may reduce or remove the penalty. Also, remember that interest on the unpaid tax and any penalties adds up daily until you pay the full amount. https://www.irs.gov/payments/penalty-relief
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