Interest and Penalties

Interest. Generally, interest is charged on taxes not paid by the due date of the reviewed year return, even if an extension of time to file is granted. Interest is also charged on penalties, such as the penalties imposed for negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements. The interest is charged from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late payment penalty. The penalty for not paying the tax when due is usually ¹ /2 of 1% of the unpaid tax for each month or part of a month that the tax remains unpaid. The penalty can’t exceed 25% of the unpaid tax.

Other penalties. Penalties can also be imposed for negligence, disregard of rules or regulations, substantial understatements of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.

• The interest figured for an IU is the interest that would be determined under chapter 67 for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year, as defined under section 6225(d)(2) or, if earlier, the date the IU is paid.

• Any penalty, addition to tax, or additional amount shall be determined at the partnership level and is applied as if that BBA partnership had been an individual subject to tax under chapter 1 for the reviewed year and the IU were an actual underpayment (or understatement) for that year for purposes of part II of subchapter A of chapter 68.

Election to apply the alternative to payment of the IU. If the partners must take into account the adjustments because the BBA partnership filed an AAR and there are adjustments that don’t result in an IU, or if a BBA partnership elects the alternative to payment of the IU under sections 6227(b)(2) and 6226(c), interest shall be determined:

• At the partner level;

• From the due date of the return for the tax year to which the increase is attributable (determined by taking into account any increases attributable to a change in tax attributes for a tax year under section 6226(b)(2)), until the date of payment; and

• At the section 6621(a)(2) underpayment rate.