Interest — Instruction 1120-REIT

Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late filing of return. A REIT that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a tax return required to be filed in 2026 that is over 60 days late is the smaller of the tax due or $525. The penalty will not be imposed if the REIT can show that the failure to file on time was due to reasonable cause.

Late payment of tax. A REIT that does not pay the tax when due may generally be charged a penalty for the failure to pay tax. The amount of the penalty is ¹ /2 of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the REIT can show that the failure to pay on time was due to reasonable cause.

Reasonable cause determinations. If the REIT receives a notice about penalties after it files its return, send the IRS an explanation and we will determine if the REIT meets the reasonable cause criteria. Do not attach an explanation when the REIT’s return is filed.

Trust fund recovery penalty. This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:

Form 720, Quarterly Federal Excise Tax Return;
Form 941, Employer’s QUARTERLY Federal Tax Return;
Form 943, Employer Annual Federal Tax Return for Agricultural Employees;
Form 944, Employer’s ANNUAL Federal Tax Return; or
Form 945, Annual Return of Withheld Federal Income Tax. The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the full amount of the unpaid trust fund tax. See the Instructions for Form 720 or Pub. 15 (Circular E), Employer’s Tax Guide, for details, including the definition of responsible persons.

Failure to ascertain ownership. If the REIT fails to comply with Regulations section 1.857-8 for ascertaining ownership and maintaining factual ownership records for a tax year, it must pay a $25,000 penalty ($50,000 for intentional disregard) upon

notice and demand by the IRS. If the REIT can show that the failure was due to reasonable cause, the penalty may not be imposed. For more information, see section 857(f).

Failure to satisfy certain REIT qualification provisions. If the REIT is required to pay the $50,000 penalty under section 856(g)(5)(C) for each failure to satisfy a REIT qualification provision of sections 856–859 (other than section 856(c)(2), 856(c)(3), or 856(c)(4)) due to reasonable cause and not willful neglect, see the instructions for Schedule J, Line 1f, later.

Other penalties. Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.