Question

Interest and Penalties (LO 12.3)

Compute the penalty described for the following taxpayers.

If an amount is zero, enter "0". If required, round your answers to two decimal places.

a. Wilson filed his individual tax return on the original due date, but failed to pay $700 in taxes that were due with the return. If Wilson pays the taxes exactly 2 months late, calculate the amount of his failure-to-pay penalty.
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b. Joan filed her individual income tax return 4½ months after it was due. She did not request an extension of time for filing. Along with her return, Joan remitted a check for $750, which was the balance of the taxes she owed with her return. Disregarding interest, calculate the total penalties that Joan will be required to pay, assuming the failure to file was not fraudulent.
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c. Jack filed his tax return 2 months and 3 days late and did not request an extension of time for filing. Jack's return indicated that he is to receive a $50 refund in taxes. Calculate the amount of Jack's penalty for failure to file his tax return on time, assuming the failure-to-file was not fraudulent.
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Answer 1

a. Wilson's failure-to-pay penalty is $12.75.

Since Wilson filed his individual tax return on the due date but failed to pay $700 in taxes, he is liable to pay ' late payment penalty' and interest charges. Penalty is 0.5% of tax amount due for the number of months defaulted. In Wilson's case, payment was made after 2 months so he has to pay penalty at 1% (0.5% times 2 months) of balance amount that is $700. So, Wilson has to pay late penalty fee of $7 ($700*0.01).

Interest charges as per July 1, 2019 is 5%, compounded daily. Wilson owes $700 that is paid 60 days (2 months) late. Daily interest amounts to $0.0959 [($700*0.05) / 365]. Daily interest amount is multiplied by 60 to arrive at total interest charges of $5.75.

Total failure-to-pay penalty with interest charges are $12.75 ($7 + $5.75).

b. Joan's penalty amounts to $168.75.

Joan failed to file her tax returns on the due date and filed the same 4.5 months after the due date. She is subject to a penalty of 5% of tax amount which is $750 for each month defaulted. Joan has to pay $168.75 (0.05*$750*4.5 months) as failure to file penalty. She is not required to pay interest charges as they are not considered.

c. Jack's failure-to-file penalty is 0.

Jack is not subject to any penalty for failing to file tax returns on or before due date as he is suppose to receive a tax refund of $50. Since it is assumed that failure-to-file was not fraudulent, he is exempted from paying penalty.