PayPal 1099 - bad news for MA and VT residents

[BobC]

Originally Posted by calvindog

Penalties and interest are determined based on a number of factors; there's not a flat 25K penalty for underpayment of taxes.

There are a variety of penalties that can be incurred. There's an underpayment penalty for not paying in enough estimated tax through the original due date of your return. That is basically an interest penalty using an interest rate that changes quarterly and is based on the applicable federal short term interest rate in effect, plus 3%.

Then once you've reached the due date for your return, you can have separate penalties for either filing your return late, or paying the taxes late, or both. Those penalties build up over time and depend on how long you wait to either file or pay the taxes you owe. In both cases the penalty for late filing can go as high as 25% of the tax due with the return, and for late payment it can go up to an an additional 25% of the tax due. These additional penalties together are limited to no more than 5% per month of the ultimate tax due, up to the maximum amounts I mentioned. Oh, and they also tack on the interest charge to what is owed on top of everything else as well.

And in what I think is the case with what a lot of you in this thread are asking about, if you file your return and misclassify yourself as a business and are therefore disallowed any net losses you tried to deduct, or if the IRS gets information from someone that shows you to be in the business of selling cards and you don't properly report the income, or collectible gain, you could end up getting hit with an additional accuracy or negligence penalty for disregarding the rules of up to another 20% owed on the amount ultimately determined to be due. And that can also still be subject to the late payment penalty, and if you didn't file the return when originally due, including extensions, they could tack on the late filing penalty as well. And of course they keep charging interest on top of everything else till they collect it all.

Still, there is no flat $25,000 penalty but, depending on what you did or didn't do, the penalties can start to add up real quick if you owe the IRS any significant amount to start with. Why do you think there are all those radio and TV commercials for the companies that claim to be able to help you get out from under the IRS?