Late Filed 1040 Interest and Penalty

[Bjorn]

Is there a way to determine the interest due on a tax return that will be filed this week?

They owe 60,000 but that of course was due 4-15 and we are now into August.

Ultra Tax can't handle the calulation. Tax Tools says no way they will do it either.

In the past I just tell the client the IRS will bill them. What other options do I have?

Mahalo

Bjorn

[skhyatt]

TTB Deluxe, page 15-2 outlines the penalties. The federal interest rate for the 2nd qtr is 7% and 8% for the 3rd qtr.

[S T]

Late Pay Penalties

The late pay penalties are figured at 1/2 of 1% per month or part of month. So it would seem that you have 5 months (past 8/15) of late pay penalties X $60,000 which would equal 5 months X $60,000 = $1500 late pay penatlies. ???

The interest is figured on a different rate and compounded at that, so you would need some software to calculate.

I can find no provision to have a tax software program calculate (Lacerte maybe), so maybe submit payment for tax plus the calculated late payment and have IRS bill the interest??

Or just wait for IRS to bill all, but then that would probably be more interest on top of interest on the penalties and interest. I can see your concern.

Sandy

[JG EA]

Clients who say

I have many client who say that they don't want me to figure the penalties/interest because the IRS never sends them a bill for it.

I think they just don't remember, but they insist that is the case.

[jainen]

some calculators

There are some calculators for interest on tax deficiencies around, such as TimeValue. Actually any amortization calculator will work--skhyatt gave you the rates, and the compounding period is daily.

It would seem that there is a penalty for underpayment of estimated taxes, as well as the late payment penalty and interest.

[KJ Judd]

Lacerte does have the option of calculating penalty & interest. I've used it to give the client an estimate of how much they owe. Often they prefer to have the IRS bill them so they have additional time to come up with the funds.

[taxfun]

taxfun

We use Denver Software to calculate federal penalties and interest. Very satisfactory.

[BOB W]

Penalties & Interest

It was discussed weeks ago that penalties assesed by IRS are removable but penalties calculated and made part of a filed tax return are not. So be careful to NOT include penalties & interest as part of return being filed for a T/P.

[jainen]

Once again

>>be careful to NOT include penalties & interest as part of return being filed for a T/P<<

Once again, I have to object that this choice belongs to the client, not the preparer. There are many good reasons to declare and pay the penalty and interest as soon as possible.

[BOB W]

jainen

You are most correct. I was just making a point that abatement in the future, relating to self computed P & I, can be to the T/P disavantage and the T/P should be fully aware of ALL reprecussions when doing so.

[Snaggletooth]

Penalty Abatement

Bob W and Jainen have been discussing the merits (and dis-merits) of calculating penalties and submitting them with the tax return. Bart is there any such word as "dismerit" ??

This brings into the discussion penalty abatement. When you mention this to the client, it really sounds great and he will want the penalty abated. Guess who he wants to be the party to chase down the IRS and get his penalty waived? That's right - it's YOU, the preparer!! And only 5% of the time does he have a reason that even has a prayer of winning his case. I have also found that many penalties are statutory and CANNOT be waived no matter what.

Often the penalty the client wants abated is less than $100. First I tell him he needs to sign over a POA to me before IRS will discuss the case. And yes, his wife has to sign it too. Then he has to pay me my hourly rate, even if this involves just waiting on the telephone.

After THREE of these attempts are unsuccessful, THEN I can talk to an Omnibus Taxpayer Advocate. At this stage of the discussion the client begins to rethink whether saving his $100 penalty is worth paying me double or triple that amount. Most of them stop at this point -- but some of them ask if THEY can do the calling themselves so they don't have to pay me to wait on the telephone.

Absolutely! Here is the phone #!!! In all my years of tax practice, however, I've never had a client actually go to the trouble to call IRS to waive a penalty. Probably the biggest reason is because the kind of people that incur these penalties are the kind of people who don't want to fool with taxes anyway and would NEVER waste their precious time on the phone with the IRS (even though they would LOVE for the preparer to call them).

I have good and careful customers who rarely are assessed a penalty and it sometimes happens. But most of the time penalties are underpayment of estimated tax, failure to file, failure to pay, and failure to assess sufficient tax liability upon filing an extension. If they listen to me, all of the above penalties can be avoided.