Question

Isabella files her income tax return 120 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $2,000, which is the balance of the tax she owes.

Note: Assume 30 days in a month.

Disregarding the interest element, enter Isabella's penalty amount for each, failure to file and failure to pay.

Answer 1

According to the return filing policy of IRS,

There is a penalty for both - late - filing of return as well as failure-to-pay of taxes.

5% of unpaid taxes for late-filing of return,

1/2 % of unpaid taxes for failure-to-pay taxes, and

5% of unpaid taxes if both things are not done.

In this case, for 120 days, none of the conditions were satisfied, and thus a single penalty of 5% of unpaid taxes per month will be charged. Moreover, a maximum of 25% can only be charged.

The rule of the IRS says that the penalty will be charged for the whole month or a part of the month.

CALCULATIONS:

No. of months for which the penalty is to be charged: 16th April to 14th August = 5 months

(* the last date of filing return is 15th April. If we roughly count the no. of months according to 120 days, it will be till August.)

Now, the penalty charged = (5% of unpaid tax) * no. of months defaulted

= (5% of 2000) * 5

= 100 * 5

= $ 500, (which is equal to the maximum limit of penalty, i.e., 25% of unpaid tax.)

Hence, the total amount of penalty is $500.