12085: Calculating Federal Late-Filing Penalties and Interest

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:

• You can include the PENALTY worksheet on the bill at Setup > Pricing (374 Wks Penalty).
• Estimated tax penalty refers to underpayment of estimated taxes, which Drake Software also calculates, or you may have to complete screen 2210 (see the 1040 Instructions).
• Penalties and interest are not calculated for Form 1040-NR or 1040-X
• Drake Software 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 20YY."

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. The rates are not displayed on Setup > Options > Optional Items on Return, but are used on Wks Penalty where available. If filing a return after the processing year for that version of Drake Tax, interest rates for the relevant quarters must be entered manually in order for them to be used for a late return. For example, quarterly interest rates used by Drake22 will be automatically updated through 2023. If filing a 2022 return in 2024, the rates must be updated manually. To 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, 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.

How do I charge my client for calculating penalties and interest for them on Wks Penalty?

To charge for late penalty calculations, you must enable the Wks Penalty on the pricing list:

1. From the Drake Home window, select Setup > Pricing. This opens the Pricing Setup dialog box.
2. From the Return Type selection area, select Individual.
3. Scroll down through the list of forms to item number 374 Wks Penalty. Make changes as follows:
   1. Form Price – (Enter the amount you wish to charge.)
   2. Include on Bill – Mark this option.
4. Click Exit to save the changes.