The Low Down on P&I

Most words and phrases don’t get an abbreviation or an acronym unless they’re used with a certain degree of frequency.  Unfortunately, in the tax debt business, “Penalties and Interest” has earned the nickname “P&I” because, yes, they are just that common.  If you wonder why you owe so much now when the original tax due was far less, here’s the low down:
Penalty for Filing Late
5% of the unpaid tax for each month the return is late (up to maximum of 25%).  This penalty is not avoided by filing for an automatic 6-month extension.
Penalty for Paying Late
.5% (1/2 of 1 percent) of the unpaid tax for each month after the tax is due, increasing to a full 1% per month after formal demand for payment is made (up to maximum of 25%).  This penalty can be avoided by filing an extension, but only if at least 90 percent of the tax liability is paid by the original due date.
The late payment penalty is reduced to .25% per month during any month that a valid installment agreement is in place so long as the return was filed on time.  See IRS website for additional information.
The interest rate on unpaid taxes is the federal short-term rate plus 3 percent, calculated every three months.  The IRS is required by law to charge interest on unpaid back taxes.  This cannot be avoided.