Q: I filed my tax return late and was shocked when I saw my tax bill. How does the IRS compute penalties?

A: Many, and shocking indeed, are the ways the IRS penalizes taxpayers for delinquent returns.

The IRS website features a Penalty Reference Chart nearly four pages long that details the dire consequences of not abiding by the tax laws. The two main penalty categories are Failure to File (FTF) and Failure to Pay (FTP).

Failure to File:
For FTF, the IRS charges 5 percent of the net amount due for the first month, and for each month, or fraction of a month that you do not file, with the amount not to exceed 25 percent of the net amount due. If the return is not filed within 60 days of its due date, the minimum you will be charged is $100 or 100 percent of the net amount due, whichever is less. The FTF does not start accruing if you have filed for a valid extension, but if you fail to file by the extension deadline, penalties begin accruing immediately.

Failure to Pay:
For FTP, the IRS charges .5 percent per month or fraction of a month, up to 25 percent of the net amount due. This penalty begins accruing immediately, even if you have a valid extension. And, in addition to these penalties, the IRS charges interest on all unpaid back taxes due.

These two basic penalty categories ratchet up whenever the IRS smells fraud or intent to evade, "substantially" or "grossly" underestimate (undervalue or otherwise misrepresent) the amount of tax you owe. Accuracy-related penalties are 20 percent of the underpayment in the case of "substantial" misstatement, and 40 percent of "gross" misstatement.

Fraudulent Failure to File:
In the case of Fraudulent Failure to File (with the intent to evade tax), the FTF is 15 percent per month, plus a 75 percent fraud penalty. Also note that, 10 days after the IRS sends out its Notice of Intent to Levy, it will increase the FTP penalty to 1 percent per month. The snowball effect of rolling penalties and accruing interest can soon bury an unwitting taxpayer, and the IRS will levy and garnish every asset it can find to pay the bill.

An experienced Certified Tax Resolution Specialist, tax attorney, or specialized CPA, in many instances, can negotiate tax-debt settlements with the IRS for those who qualify. The IRS requests that taxpayers have good reason for penalty abatement, and individuals who want to increase their chances of having their penalties forgiven should consider consulting with a qualified tax relief professional.

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