IRS Penalty Calculator: Understanding Penalties and Your Liability

How much do you owe the IRS, and at what rate will your debt grow? These are critical questions, especially when dealing with the IRS. Tax debt is a few types of debt that can’t typically be avoided even with bankruptcy, and the IRS is a powerful creditor. Let’s look at what penalties the IRS might apply to your tax account and how to deal with them. Here is your handy IRS penalty calculator guide.

When Does the IRS Apply Penalties?

The IRS can apply over a hundred different penalties, but not all of them will be relevant to you as a taxpaying individual. For the most part, the IRS penalty calculator identifiers that individuals should worry about include:

  • Failure to File Penalties: This penalty applies to missing the due date on your tax return. It is a penalty of 5 percent of your current unpaid taxes per month, at a maximum of 25 percent after five months. If you also have a Failure to Pay penalty for that month, your Failure to File penalty is reduced to 4.5 percent.
  • Failure to Pay Penalties: This penalty applies to failing to pay your tax debt by the deadline on your notice. This is a penalty of 0.5 percent per month, at a maximum of 25 percent after 50 months. This penalty may be adjusted depending on whether you are under a tax levy or within an IRS payment plan.
  • Accuracy-Related Penalties: These penalties apply to missing income returns or using deductions you do not apply for. You can also accrue an accuracy-related penalty for the understated tax liability. The accuracy-related penalty is 20 percent of the portion of the tax debt created by your mistake.
  • Underpayment of Estimated Tax by Individuals Penalties: This penalty is applied when an individual making regular tax payments doesn’t pay their estimated tax or pays it late. The penalty is individually calculated based on the amount owed, when the tax was due, and the current interest rate.
  • Dishonored Check Penalties: If you write a check to the IRS and it bounces, the IRS can penalize you depending on your deposit amount. If it was less than $1,250, the penalty is the payment amount or $25, whichever is less. If it was more than $1,250, the penalty is 2 percent of the payment amount.

Calculating Your Penalties With the IRS Penalty Calculator

In addition to fines, the IRS also charges a monthly interest rate on your liabilities. Adding all your penalties up can be a little tricky. It depends on your tax liability, your current tax debt, whether you have multiple tax debts, and which penalties apply to your unique situation.

An excellent way to check just how deep in the red you are with the IRS is to visit your online tax account via the official IRS website. You can see your current total tax debt owed, but you can also view your current and past payment history and any scheduled or due to payments if you have entered into a payment plan.

What About Interest?

In addition to tax penalties racking up your tax debt, your debt is also subject to a variable interest rate. For standard corporate and non-corporate underpayments, which includes individuals owing money to the IRS, the interest rate is three percent plus the federal short-term rate.

The IRS publishes the current applicable national short-term rate through the IRS Newswire subscription service. Monthly interest rates accrue on top of your current debt. Unlike IRS penalties, there is no limit on an IRS interest rate – your debt will continue to grow even after hitting the limit on fines.

Can I Eliminate My IRS Penalties?

There are up to four different penalty abatement options at your disposal when working with the IRS. These include:

  • Arguing an error on the IRS’s part. Yes, the IRS can get things wrong – they’re only human, after all. But you have to provide proof.
  • Providing reasonable cause for why you missed your payment. This can mean financial distress, a recent personal loss, inability to obtain the paperwork, death in the immediate family, etc.
  • Administrative waivers. This includes first-time penalty abatement, which taxpayers can use to waive their penalties if they have been otherwise compliant for at least the last three years.
  • Statutory exceptions. These are rare, so don’t count on them. They include being in an active combat zone while your payment or filing date came and passed or extensions as part of disaster relief (we had one during the beginning of the pandemic).

Aside from penalty abatement, the most reliable way to keep the IRS from penalizing you further is to catch up with your taxes. This is not a very satisfying answer, but it may not be as financially crippling as you assume. Even if you cannot afford to foot the bill in its entirety right now, you can enter into a reasonable payment plan with the IRS to pay off your tax debt over multiple years in monthly installments.

Alternatively, you can pay off your debt within six months or less via multiple lump sums. If your debt is unreasonably large given your current financial circumstances, you may be able to argue for an offer in compromise. An offer in compromise is a payment plan that considers your current disposable income (income after taxes) and applicable assets to determine what you can afford to pay every month for a set period.

Offers in compromise may allow you to pay a fraction of your total tax debt simply because it isn’t reasonable for the IRS to collect more than you can pay (without approaching financial destitution). Of course, using the IRS penalty calculator, there are a lot of pre-qualifying calculations that go into accepting an offer in compromise, and it can take several weeks for the IRS to deliberate your proposal.

And in the end, they still might not accept it. But it can be worth a shot, especially if you have been facing financial difficulties. Entering into an offer in compromise or a payment plan with the IRS can reduce the rate at which you garner interest and potentially put a hold on or reduce future penalties.

Another way to reduce the impact of the IRS’s penalties and potential collection actions for the meantime is to apply as currently not collectible. This will not erase your debt or eliminate your penalties, but it will make the IRS hold off on pressuring you for any payments until your financial situation improves. This is usually the last resort for desperate measures.

Working with the IRS can be difficult. They may have sworn to protect taxpayer rights, but that doesn’t make it any easier for the taxpayer when they find out that they’re in debt to the government and face potential penalties for failing to pay within a deadline.

However, while confusing and seemingly unreasonable, there is a method to the madness. Our tax law professionals here at Rush Tax Resolution can help you navigate the IRS’s requirements and bring you one step closer to being back in the IRS’s good graces.