How to Calculate Interest Rate & Penalties on Late Taxes

by Matt McGew

If you fail to pay your full income tax debt on time, the Internal Revenue Service will impose interest and penalties. The maximum penalty imposed by the IRS is 25 percent of the tax due, and the IRS will not charge penalties beyond this maximum threshold. You can manually calculate the interest and penalty fee owed to the IRS.

1. Determine the amount of late tax you owe the IRS. Generally late tax is any tax payment made after April 15. For example, assume you have a $10,000 outstanding tax payment owed to the IRS.

2. Determine the amount your tax payment is past due. For example, assume your payment is 12 months past due.

3. Calculate your IRS penalty fee. The IRS charges a 0.5 percent per month penalty fee. Continuing the same example, you would multiply the 0.5 percent penalty by the number of delinquent months to calculate the penalty multiplier. Next, convert this penalty multiplier to a decimal by dividing by 100. Therefore, 12 x 0.5 = 6. Continuing the example, 6/100 = .06 and $10,000 x .06 = $600. This fee represents the penalty fee owed to the IRS, assuming you paid the tax debt exactly 12 months after the due date. The IRS also increases the penalty fee to 1 percent per month starting 10 days after the IRS sends you notification of intent to levy.

4. Calculate the IRS interest payment. The interest charged is 3 percent plus the federal short-term rate. For example, assume the federal short-term rate is 2 percent, then calculate 2 + 3 = 5 percent. Continuing the same example, $10,000 x .05 = $500. This figure represents the interest owed to the IRS for your late tax payment. If you make your tax payment during the year, you would prorate the amount of interest charged. You can also call the IRS at 800-829-1040 and ask for the exact amount of interest due for a specific payoff date.

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