Question

David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000. which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are:

a.$400.

b.$3,600.

c.$4,000.

d.$4,400.

e.None of these choices are correct.

Answer 1

Option C is correct.

David's total failure to file and to pay penalties are $4,000.           

Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)]			$ 400
Failure to file penalty [5% × $40,000 × 2 (two months violation)]    Less: Failure to pay penalty		$4,000 (400)	$3,600
Total Penalty			$4,000

Penalties for failure to timely file returns or timely pay tax

Penalty for Failure to Timely File Return: If a taxpayer is required to file an income or excise tax return and fails to timely do so, a late filing penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month (or partial month) the return is late, up to a maximum of 25%. A minimum penalty of $205 may apply for returns over 60 days late. The minimum penalty is the lesser of $205 or 100% of the tax due on the return.

Penalty for Failure to Timely Pay Tax: If a taxpayer fails to pay the balance due shown on the tax return by the due date (even if the reason of nonpayment is a bounced check), there is a penalty of 0.5% of the amount of unpaid tax per month (or partial month), up to a maximum of 25%.

Penalty for Failure to Timely Pay After Issuance of Notice: If a taxpayer fails to pay any additional tax assessed by the IRS (usually as a result of an audit) the taxpayer may be liable for a penalty equal to 0.5% for each month (or partial month) during which the failure continues, if the amount is not paid within 21 calendar days after the date of an IRS notice demanding the payment.

If both the failure to file and the failure to pay penalties apply during the same month, then the failure to file penalty is reduced by 0.5% each month.