Generating Penalties and Interest on Form 1040 in ProConnect Tax

To automatically calculate the state or federal interest due:

1. Go to the Input Return tab.
2. On the left-side menu, select Payments, Penalties & Extensions.
3. Click on Penalties and Interest (2210).
4. Enter the date this return will be filed in the Filing date field.
5. On the top navigation menu, select Late Return Penalty & Interest.
6. Enter 1 in the Interest (1=automatic), Late filing of return (1=automatic), and Late payment of tax (1=automatic) fields
   • If state interest rates are also required, select State & Local Int. Rates across the top and enter the applicable interest rates.

Note: The Penalties and Interest amount will generate a worksheet. They will not be included on Form 1040, Amount You Owe.

Per IRS Pub 17, pg 19 - Late Payment Penalty: The taxpayer isn't subject to the late payment penalty during the automatic 6 month extension period if they paid at least 90% of their current tax liability by the original due date of the return and pay the balance when they file their return.

• The late filing penalty is 5% per month, with a maximum penalty of 25%.
• The late payment of tax penalty is 0.5% per month, with no maximum penalty.
• Interest is calculated per the IRS published rates.

The equation for calculating interest is:

• P = T (1 + r/n)^d
  • P = tax plus penalty
  • T = tax owed at the end of the previous quarter
  • r = interest rate
  • n = 365 (number of days in the year)
  • d = number of days not paid within the quarter
• P must be calculated for each quarter that the taxes were not paid
• After calculating P for a quarter, it becomes T for the next quarter
• Example:
  • Taxpayer owes $500
  • Pays on November 21 of the same year
  • Q2 interest rate - 4%
  • Q3 interest rate - 5%
  • Q4 interest rate - 3%
  • P_Q2 = $500 * (1 + 0.04/365)⁷⁶
    • 76 is the number of days from April 15 until June 30
    • P_Q2 is the tax plus penalty at the end of the second quarter
  • P_Q2 = $504
  • P_Q3 = $504 * (1 + 0.05/365)⁹²
  • P_Q3 = $511
  • P_Q4 = $511 * (1 + 0.03/365)⁵²
    • 52 is the number of days from October 1 until November 21
  • P_Q4 = $513
  • Subtract the initial $500 in taxes owed, and that leaves a $13 penalty

ProConnect Tax will calculate interest until June 30 three years after the due date of the return.  Adding the penalty that ProConnect Tax calculates to the owed tax will be T for the quarter starting July 1 three years after the return was due.

For returns filed more than three years late, ProConnect Tax will not automatically calculate interest rates. Instead, those rates should be manually calculated and entered. To manually generate interest and penalty amounts for a late return:

1. Go to the Input Return tab.
2. On the left-side menu, select Payments, Penalties & Extensions.
3. Click on Penalties and Interest (2210).
4. Enter the date this return will be filed in the Filing date field.
5. On the top navigation menu, select Late Return Penalty & Interest.
6. Enter the calculated amount of interest in the Interest field.

Notes:

• Per the 4868 instructions, if a taxpayer can show reasonable cause for not paying on time, the late payment penalty is waived. A taxpayer is considered to have "reasonable cause" for the period covered by an automatic extension if at least 90% of his/her actual tax liability is paid before the regular due date.
• Penalties and Interest will not calculate on 1040X per IRS; they will figure any late filing or late payment amounts.