• A penalty for failure to file; 5% per month of the amount due up to a maximum of 25% for 5 months (2005)

• Interest on the amount due.  This rate is adjusted and is based upon current interest rates. (more on this later)

If John and Anna had filed for an extension by April 15 and sent in a payment equal to or more than the amount due, penalties and interest would not have occurred.  (If you file on time but don't pay all amounts due on time, you'll generally have to pay a late payment penalty of one–half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is applied)

IRS assesses millions and millions of penalties each year, resulting in billions of dollars.  Around 50% of the penalties are forgiven (abated) due to valid reasons for not filing taxes on time.  Valid reasons for abatement of penalties is listed in the Internal Revenue Manual (IRM)  Reasons range from being mislead by your Tax professional to receiving false information from IRS to illness, hospitalization, drug rehab, nervous breakdown or tax return being lost by IRS.

Penalties and interest can double your tax liability over a period of time.   Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate on unpaid Federal tax is determined and posted every three months. It is the federal short–term interest rate plus 3 percent. Interest is compounded daily.

IRS uses the "reasonable cause" line to determine if you qualify to abate your penalties.  For legal details on the Internal Revenue Manual (IRM) visit:  http://www.irs.gov/irm/part20/index.html  - And remember to attach a copy of supporting documentation (copy of hospital bill, etc) to your Form 843 - Claim for Refund and Request for Abatement.

Interest is usually not abated unless the tax was incorrectly or illegally assessed.

These tax tips are provided by http://www.taxeswilltravel.com  an online tax resolution center for individuals with tax issues.  For legal explanation of the above article, visit: http://www.irs.gov  keywords; penalties, abatement form, interest