Sam Brotman, JD, LLM, MBA December 16, 2013 5 min read

Types of IRS Penalties - Part One

Underestimate and Late Payment IRS Penalties

It is possible for a taxpayer to underestimate the amount of tax due, because estimations are based upon predictions. A taxpayer is required to withhold tax or make quarterly estimated tax payments by the end of the year. The taxpayer must estimate this amount. There is an IRS penalty assessed for amounts that are too little more than estimated or too little tax withheld. The penalty is computed similarly to interest on the amount that should have been paid but not paid.

A different charge applies for a taxpayer that has filed an income (or excise) tax return and incurs a balance but fails to pay that balance when due (without extensions). The charge within this context has two parts. The first part is an interest charge. It is computed in the same way as the penalty charge above. The second charge is a penalty of 0.5% per month. The second charge is applied to the unpaid balance of both tax and interest. The 0.5% per month charge is capped at 25% of the total unpaid tax. “The underestimate penalty and interest on late payments are automatically assessed. No ‘reasonable cause’ exception is available for avoiding these penalties” (, “IRS Penalties,” 9/11/2013). Taxpayers can expect to be charged these penalties regardless of their financial and/or economic situation.

IRS Penalties for Failure to File; Timely Pay Tax

There are three categories that fall under this section of IRS penalties. For one, the penalty for failure to timely file return is defined as the failure of the taxpayer to file an income or excise tax return in a timely manner. Within this context, the taxpayer’s tax balance will be assessed a late filing penalty. The penalty assessed is 5% “of the amount of unpaid tax per month the return is late, up to a maximum of 25%. A minimum penalty of $135 may apply for late filing of an income tax return” (, “IRS Penalties,” 9/11/2013). In contrast, the penalty for failure to timely pay tax is defined as the taxpayer’s failure to pay the amount shown on a tax return. Bounced checks apply. The penalty assessed for this type of failure is 0.5% “of the amount of unpaid tax per month the return is late up to a maximum of [twenty-five percent]” (, “IRS Penalties,” 9/11/2013).

The third category is IRS penalty for failure to timely pay after issuance of notice. This IRS penalty is assessed because of the taxpayer’s failure to pay the tax or other related required amount shown on the tax return, but it is not shown on the return. In this case, the taxpayer will be liable for a penalty of 0.5% per month applied to the amount. The penalty is applied each month the failure continues. The penalty is applied also “if the amount is not paid within 21 calendar days after the date of an IRS notice demanding the payment” (, “IRS Penalties,” 9/11/2013). In cases where the penalty for failure to file and the penalty for failure to pay is assessed at the same time, “then the failure to file penalty is reduced by 0.5% each month” (, “IRS Penalties,” 9/11/2013). The 25% cap will only apply to the 5% late filing penalty fee and the 0.5% late payment penalty (, “IRS Penalties,” 9/11/2013). In some cases, the late filing penalty can be waived or abated if the taxpayer can prove reasonable cause. The penalty for failure to file accrues interest from the date the return is due “whereas the failure to pay and failure to show penalties begin accruing interest from the date of notice and demand” (, “IRS Penalties,” 9/11/2013).

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law



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