IRS Penalties and Interest

In a previous entry, Bruce shared what it is like to be audited by the IRS. Here, we’re going to discuss another scary part of the IRS: penalties and interest.


Making mistakes on our tax returns, forgetting to file, or not having enough money to pay what we owe can happen to the best of us. We know there will be negative consequences, but how negative are they? Well the consequences can range anywhere from some minor interest charges to several years in prison.

Since our clients are honest people, we’ll assume that any issues you have were honest mistakes that don’t warrant jail time. Those mistakes, however, will probably warrant some penalties and/or interest. Interest and penalties can accumulated quickly, so it is important to file your taxes and pay any balance due on time. The IRS can assess any and all of the most common penalties faced by taxpayers, as shown below:

Failure to file or late filing of your return: Penalty is 5% of unpaid balance for each month the return is late (maximum of 25%)

Failure to pay or late payment: 0.5% of unpaid balance each month it is late (approximately 6%)

Underpayment of estimated tax: Interest at the federal rate for underpayment (currently 4%)