How can I estimate late fees + fines for amended tax returns?

Question

I'm a Maryland resident. Last week, I had an accountant prepare an amendment to my 2013 tax returns (which I filed in early 2014).

This amendment means I will have to pay some extra taxes for 2013:

• State of Maryland: $464
• IRS: $2345

Of course, I assume I will have to also pay some fines/interest for paying this amount 3 years late. Is that correct?

When I asked my accountant how much the fines/interest would be, she said she didn't know. Once I sent the amendment in, the State Comptroller and the Federal Treasurer would then respond with the fines/interest amounts.

I would like to know an estimate of how much the fines/interest will be before I mail in the amendment. And what will the payment schedule be? How can I find out this information? It's very important for me to know that.

I'm interested in calculating the late fees and interest because it will determine when I file the amendment. If I file it, and they tell me "Okay, you have to pay us an additional $5,000 within the next week", I'll be stuck.

Answer 1

For planning purposes, here is how you might get a rough estimate of what the maximum interest + penalties could be.

Interest

According to Tax Topic 653, the interest is calculated at a rate of the federal short-term rate + 3%, compounded daily. The federal short-term rate is currently 0.64%, so for our rough estimate, we'll assume a rate of 3.64%. (Actually, the rate can change each quarter, but we'll assume it is constant.) The tax was due on April 15, 2014, so if you pay the tax on June 15, 2016, I calculate the interest on $2345 to be about $193.

Penalty

The failure to pay penalty listed in Tax Topic 653 is 0.5% each month, up to a maximum of 25% of the amount owed. Paying now would make the payment 26 months late, so the penalty on $2345 could be as much as $305.

I haven't estimated the taxes and penalties for Maryland, but since you only owe $464, the amounts should be much smaller than the federal amounts.

You should send this in as soon as possible to minimize interest and penalty, but your accountant is wise to let the IRS and state calculate the interest and penalty and send you the bill, because they may waive it.

Answer 2

You can start with the IRS Tax Topic 653 publication on the issue.

However, what your tax adviser suggests is a common practice. You're not required to calculate the penalties yourself, and will not be penalized for not doing so. At least on the Federal level, but I'm guessing the State law won't be significantly different. You can do that, but don't have to, you can leave it to the IRS and have them calculate your penalties and send you the bill.

The reason tax advisers take this approach is because many times the IRS won't bother.