Understanding IRS Penalties

You receive a notice from the IRS that includes one or more penalties. The penalty is identified by a code. Click here for a general discussion of IRS penalties.  The IRS should include a 4-page information sheet with the return indicating the nature of the penalty. Some penalties only apply to specific returns, for example, late depositing of employment taxes. There are over 60 different codes applying to penalties, interest, and adjustments in that 4-page notice. In this list we'll give you some detail on the most important and frequently encountered penalties, interest, etc. 

Penalty Notice Codes

01 Filing and Paying Late. There's a 4-1/2% per month penalty for filing late and a 1/2% per month penalty for paying late. It applies to individual and some other returns. The maximum penalty is 47-1/2%.

02 Underpayment of Estimated Tax. This one's easy. The penalty applies if you did not pay in enough in estimated taxes, or you didn't make the payments on time. Remember, you generally have to make estimated payments each quarter. You can't make up a deficiency in one or more quarters by paying a larger amount later.

03 Failure to Deposit--Federal Tax Deposits Insufficient/Late. If you don't make your federal employment tax deposits on time, you're liable for a late deposit penalty. The penalty is 2% for deposits made 1 to 5 days late; 5% for deposits 6 to 15 days late; and 10% for deposits made 16 days or more late, but on or before the 10th day after the date of the first notice the IRS sends asking for the tax you owe. If you don't pay the amount you owe within 10 days of the date of the first notice showing the tax due, the penalty automatically increases to 15%.

04 Dishonored Check. This one's simple. For checks of $15 or more, the penalty is $15 or 2% of the check amount, whichever is greater. For checks of less than $15, the penalty is the check amount.

08 Missing Taxpayer Identifying Number. The penalty is $50 for failure to put a dependent's social security number on your individual return, failure to provide your identification number to another person, or if you're a business, failing to include your employer identification number on an information return.

11 Failure to Deposit--Federal Tax Deposits Insufficient/Late and Incomplete Record of Federal Tax Liability. The penalty here is similar to 03 Failure to Deposit, above, but the reason is a little more complicated. The penalty may be for late filing but it could also be for a record of tax liability that was incomplete or illegible, or the liability amounts you reported didn't equal the net taxes for the tax period. If that happens, the IRS averages the total tax liability and distributes it equally over the tax period. It then applies your deposits to the averaged liabilities in the date order it receives them. Here there's a very good chance the penalty is either not applicable or computed incorrectly. If you send a complete breakdown of the tax liability on Form 941, Schedule B, you may be able to get the penalty reduced or eliminated.

13 Avoidance Penalty (Estimated Tax). If you're required to file your estimated taxes electronically and did not do so, this is the penalty that will be assessed.

27 Penalty on Tips. If you're required to report tips to your employer and didn't do so, there is a penalty equal to 50% of the social security tax on the tips you didn't report.

32 Partnership Late Filing. While there is no tax due with a partnership return, there is a penalty for failure to file the return. It's equal to $50 for each person who was a partner at any time during the tax year for each month or part of a month the return was filed late, for up to 5 months. For example, your partnership return is due April 15 and you don't file till July 30 (and you don't have a valid extension). There are 3 partners in the business. You'll owe $600 ($50 X 4 months X 3 partners).

33-39 and 45-52 Filing Incomplete Return. The same type of penalty can be assessed for filing an incomplete return, that is, a return with one or more schedules missing. The codes indicate the missing schedules. The schedules are K-1, L (balance sheet), K, and K-1s that are missing taxpayer identification numbers.

41 Failure to Deposit--Taxes Paid Directly to IRS. You can be subject to a penalty if you pay employment taxes directly to the IRS instead of depositing them with an authorized financial institution or depositing them electronically. The penalty is 10% of each payment you didn't deposit property. 42 Failure to Deposit--Insufficient or Late Deposits and Taxes Paid Directly to IRS. This is a possible combination of penalty codes 03 and 11, above.

43 Failure to Deposit--Taxes Paid Directly to IRS and Missing Information. This is a combination of penalty codes 11 and 41.

44 Failure to Deposit--Insufficient Late Deposits and Taxes Paid Directly to IRS and Missing Information. This is a combination of penalty codes 03, 11, and 41.

54 Failure to Deposit--Deposits Insufficient/Late and Incorrect Record of Federal Tax Liability. The penalty is charged when it appears you didn't deposit the correct amounts of tax on time. The IRS records probably showed you as a semi- weekly depositor, but your Form 941, Schedule B didn't have enough information on it for the Service to determine if you made your deposits on time or in the correct amounts.

57 Failure to Deposit--Deposits Insufficient/Late and Incorrect Record of Federal Tax Liability. You were charged a penalty because according to the IRS records, you didn't deposit your tax using the one-day deposit rule for liabilities of $100,000 or more during a deposit period. In addition, the Record of Federal Tax Liability on your return was incomplete and the Service couldn't determine if you made your deposits on time or in the correct amount.

Other Notice Codes

09 Interest. If you don't pay your tax on time, you're liable for interest on the amount of the underpayment. The interest rate varies by quarter. 

The IRS can charge additional interest of 2% if you don't make your corporate tax payment within 30 days after the Service notifies you of the underpayment of tax. This applies to underpayments of amounts of $100,000 or more.

19 Additional Interest Charges. If the IRS doesn't receive your payment within 10 days of the date of the notice, the Service can charge you additional interest until the underpayment is paid in full.

22 Balance Less than $1. If the amount you owe is less than $1, you do not have to pay it.

23 Refund Less than $1. If your refund is less than $1, the IRS will not automatically send you check. However, you can request the refund, no matter how small.

24 Refund. The IRS will refund your overpayment (plus interest when applicable), if you owe no other taxes or have no other debts the law requires the IRS to collect.

13 Withholding Credits. The IRS made a change to your withholding tax credits.

14 Estimated Tax Credits. The IRS has made a change to your estimated tax credits.

15 Credits. The IRS made a change to credits other than estimated tax.

29 Erroneous Credit. The IRS found a credit applied to your account in error. An enclosed notice will show the correct balance due.

Penalty Abatement

If you receive a penalty, there are two possibilities. The penalty is correctly assessed or the penalty does not apply. The second situation doesn't occur very often. If you filed a return late, the penalty applies. While the IRS may abate it, it's correctly assessed. In some cases the penalty doesn't apply because the IRS is wrong or has bad information. For example, on your Schedule B to Form 941 you reported the date you paid your payroll incorrectly. While your deposit was made on time, because Schedule B is incorrect, the IRS believes your deposit was late. In this situation you can get the penalty removed by informing the IRS of the mistake on Schedule B.

The IRS has the power to abate many, but not all penalties. In many cases you can have the penalty removed if you can show reasonable cause. That may not be so easy. Showing that you relied on erroneous written advice from the IRS is one reason. Another is reliance on a professional such as a CPA, tax attorney, etc. The penalty for filing a return or depositing taxes late may be abated because of a business catastrophe such as a fire or flood, but simply forgetting because you were busy isn't a good excuse. If the penalty is much more than $100 you might consider seeking professional help. Most tax professionals know of more reasons that can be used to escape the penalty. Their bill should be more than offset by the penalty savings.

IRS notices generally contain a number reference.  Following is an index that may help you to understand what the notice is referring to and in what stage of collection the notice is in.

Number     Notice Explanation 

 01         Filing and paying late 

02         Underpayment or late payment, estimated tax 

03         Failure to deposit-Federal tax deposits, insufficient, late 

04         Dishonored check 

05         Fraud 

06         Negligence penalty 

07         Paying late 

08         Missing taxpayer identification number 

10         Filing late-exempt organizations and certain trusts 

11         Failure to deposit-Federal tax deposits, insufficient, late, record of liability 

12         Incomplete return 

13         Avoidance penalty (estimated tax, electronic requirements) 

14         Fraud, late filing penalty 

17         Penalty removed 

27         Penalty on tips 

28         Examining officer's report (penalty explained on examining officer's report) 

30         Late payment penalty removed 

31         False W-4 penalty 

32         Partnership late filing 

33         Missing schedule K-1 

34         Missing schedule L (balance sheet) 

35         Missing schedules K-1 identification numbers (TINs) (5 or more) 

36         Missing schedules K-1 and L 

37         Missing schedules K-1 and K-1 TINs 

38         Missing schedule L and schedule K-1 TINs 

39         Missing schedules K-1, K-1 TINs, and L 

40         Overstatement, understatement, or accuracy related penalty 

41         Failure to deposit, taxes paid directly to IRS 

42         Failure to deposit, insufficient or late deposits paid directly to IRS 

43         Failure to deposit, taxes paid directly to IRS and missing information 

44         Failure to deposit, insufficient late deposits paid directly to IRS and missing info 

45         Missing schedule K 

46         Missing schedules K and K-1 

47         Missing schedules K and L 

48         Missing schedules K and k-1 TINs (5 or more) 

49         Missing schedules K, K-1, and L 

50         Missing schedules K, K-1, and K-1 TINs 

51         Missing schedules K, L, and K-1 TINs 

52         Missing schedules K, K-1, L and K-1 TINs (5 or more) 

53         10% penalty for IRC Sec. 444 election 

54         Failure to deposit, incorrect record of federal tax liability 

55         Failure to deposit, missing or incorrect information, taxes paid directly 

56         Failure to deposit, deposits insufficient/late, incorrect record, taxes paid       directly 

57         Failure to deposit, deposits insufficient/late, and incorrect record

 Interest, Account Status, Credit Adjustments

Number     Notice Explanation 
 
09         Interest 

19         Additional Interest Charges 

22         Balance less than $1 

23         Balance due less than $1 

24         Refund due 

25         Notice of selection for examination 

13         Withholding credits 

14         Estimated tax credits 

15         Credits (adjustments to credits) 

29         Erroneous credit (notice shows correct amount due) 

 l6         Payment due

 CP Number Explanation

CP Number       Notice Title 

CP 12           Math error - Overpayment of $1 or more 

CP 14           Balance due, No math error 

CP 49           Overpaid tax applied to other taxes you owe 

CP 161         No math error, balance due 

CP 501         Reminder notice--Balance due 

CP 504         Urgent notice--Balance due 

CP 515         First notice--Return delinquency 

CP 518         Final notice of overdue tax return 

CP 523         Notice of default on installment agreement 

CP 2000       Notice of proposed adjustment for underpayment/overpayment

Click here to read about Reducing IRS Penalties

As always, for an evaluation of a penalty being assessed against you by the IRS, please call our offices at (915) 581-1040.  It doesn't matter where you are, WE CAN HELP.