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12085: Calculating Federal Late-Filing Penalties and Interest


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How do I calculate federal late-filing penalties and interest in Drake Tax? 
 

The software calculates late-filing penalties and interest in an individual return when:

  1. A date later than the due date is entered on the LATE screen in the field Date return was filed.
  2. And one of these two options is checked:
    • the LATE screen option Calculate penalties and interest on this return;
    • the global option Automatically calculate penalties and interest on returns filed after the due date... on the Setup > Options > Optional Items on Return tab.

The LATE screen also allows you to:

  • suppress penalties and interest calculation altogether (overriding the global option),
  • prevent calculated penalties and interest from appearing on the filing instructions, payment voucher and result letter,
  • override penalties and interest and the return due date.

The software figures penalties for failure to file and failure to pay, as well as the interest on late payment. These results appear in the PENALTY worksheet and, unless suppressed, the total amount is included in:

  • the balance due in the filing instructions,
  • the 1040-V (payment voucher),
  • the result letter.

Caution: The "Due date of the return" field defaults to the original deadline of the return. If the return is under extension, you do not enter the extended due date in this field. This will cause the software to start calculating the penalty and interest after the date in that field.

Note that the failure to pay penalty does not apply during the automatic 6-month extension of time to file period if the taxpayer paid at least 90% of actual tax liability on or before the due date of the return and pays the balance when filing the return. For more information on penalties, see Publication 17.

Notes:

  • An amount shown on line 78 on a 1040 or line 50 on a 1040-A will not match the penalty calculations, because that amount reflects penalties only up to April 15.
  • You can include the PENALTY worksheet on the bill at Setup > Pricing (0374 Wksht Penalty).
  • Estimated tax penalty (line 79 of the 1040). This refers to underpayment of estimated taxes, which Drake also calculates, or you may have to complete screen 2210 (see the 1040 Instructions for calculating line 79).
  • Penalties and interest are not calculated for form 1040-NR. 
  • Drake calculates the failure to file penalty, failure to pay penalty, and interest on late payment. Quarterly rates for individual returns, used to calculate late-filing interest, are announced in an IRS news release in the month preceding the quarter. Go to www.IRS.Gov and search "interest rates 2018."
  • Estimated tax penalty. This refers to underpayment of estimated taxes, which Drake calculates, or you may have to complete screen 2210 (see the 1040 instructions for calculating the 2210). See Related Links below for details. 

How is the Interest Rate Determined for the Calculation?

Drake supplies the interest rate when it updates the software, until the end of the processing year. For example, quarterly interest rates used by Drake17 will be automatically updated through 2017. After that, you must update the interest rates yourself on the Setup > Options > Optional Items on Return tab.

To update the interest rate -

Quarterly interest rates are updated automatically in the program through the processing year. The automatic quarterly update is posted before the start of each quarter. Go to Tools > Install Updates to update the software if it is needed.

If a late return will be filed after the end of the processing year, you must update the quarterly interest rates for the program manually.

  1. Go to the Options > Optional Items on Return tab in the Setup tab.
  2. Check the box Calculate penalties and interest on returns filed after the due date based on interest rates below.
  3. Enter the appropriate available rates for quarters in the years following the processing year. For example, for Drake09, you must enter all quarterly rates manually for 2011 and later years up to and including the quarter in which the return is filed.
  4. Click OK to exit the screen and save settings.
  5. Note that any entry made in an automatically updated quarter will override the rate set by a Drake update. The default entries 00.00 are ignored.

For more information about tax penalties and interest rates for late-filed individual returns, see Related Links below.


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