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Potential Penalties and Interest for 2023 Tax Returns

Underpayment Penalty

The IRS has increased the underpayment penalty to 8%, up from 3%, due to rising interest rates. Underpayments may occur when the tax is not withheld by an employer, such as for rideshare drivers and gig workers.

To avoid underpayment penalties, most filers must pay 90% of their taxes (or 100% of last year’s taxes) through withholding or estimated payments. Also, the IRS will not charge an underpayment penalty if the balance due is less than $1,000. To assist you in making estimated tax payments, please refer to the IRS resource at: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Interest and Penalties for Late Filing and Late Payment

You should file your return and pay any tax owed when due, on or before April 15. You should file your return even if you cannot pay. Filing returns on time and paying as soon as possible will keep interest and penalties to a minimum.

Generally, interest accrues and is compounded daily on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is 8% as of the date of this article.

If you file a return but don’t pay all tax owed on time, you’ll generally have to pay a failure to pay penalty. This penalty is 0.5% for each month, or part of a month, up to 25%, of the amount of the unpaid tax until the tax is paid. If needed, you can file an Instalment Payment Request (form 9465) to pay amounts owed over time. With an active installment agreement, the failure to pay penalty is reduced to 0.25% per month.

If you owe tax and don’t file on time, there’s also a failure to file penalty. This penalty is usually five percent of the tax owed for each month, or portion of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there’s also a minimum penalty for late filing equal to the lesser of $485 or 100% of the tax owed.
To the extent you are subject to penalties for failure to pay or failure to file, please contact the Tax Clinic to explore whether it may be possible to dispute or reduce the penalty. They can also assist with payment alternatives for balances due to the IRS.