Penalties and Interest

The North Carolina General Statutes provide both civil and criminal penalties for failure to comply with the income tax laws. The more common penalties are included below. For additional information, see G.S. § 105-236. In addition to any applicable penalty, all assessments of taxes or additional taxes bear interest at the applicable rate from the due date until date of payment.

1. Failure to File and Failure to Pay Penalties

Under the provisions of G.S. § 105-236, both the late filing and late payment penalties can be applied for the same month. If the return is filed late with net tax due, both the late filing and late payment penalties will be assessed at the same time. “Net tax due” is the amount of tax required to be shown on the return less any timely payments of the tax and allowable credits.

Returns filed after the due date are subject to a failure to file penalty of 5% of the net tax due for each month, or part of a month, the return is late (maximum 25% of the additional tax), If the return is filed under an extension, the late filing penalty will be assessed from the extended filing date rather than from the original due date.

The late payment penalty is 10% of the tax not paid by the original due date of the return. If a timely extension is filed, the penalty will apply on any remaining balance due if the tax paid by the original due date of the return is less than 90% of the total amount of tax due. If the 90% rule is met, any remaining balance due, including interest, must be paid with the income tax return on or before the expiration of the extension period to avoid the late payment penalty. Interest is due from the original due date to the date paid.

The late payment penalty will not be assessed if the amount shown due on an amended return is paid with the return. Proposed assessments of additional tax due are subject to the 10% late payment penalty if payment of the tax is not received within 45 days of the assessment unless a timely Request for Departmental Review is filed.

2. Large Tax Deficiency and Negligence Penalties

When there is an understatement of taxable income equal to 25% or more of gross income, the 25% large individual income tax deficiency or other large tax deficiency penalty will be assessed. When the percentage of understatement of taxable income is less than 25%, the 10% negligence penalty may be applied. The application of the 10% negligence penalty is based on the understatement of tax and will be made on the basis of the facts in each case. When the accuracy penalty has been assessed for federal income tax purposes, the 10% negligence penalty will be assessed for State income tax purposes, unless the 25% large individual income tax deficiency or other large deficiency penalty applies.

A large tax deficiency penalty or a negligence penalty cannot be assessed when the fraud penalty has been assessed with respect to the same deficiency.

3. Failure to Report Federal Changes

When a taxpayer fails to report federal changes within six months from the date the taxpayer is notified by the Internal Revenue Service of the correction or final determination, the taxpayer is subject to the failure to file penalty and forfeits the right to any refund as the result of the federal changes. The failure to file penalty begins at the expiration of the six month period.

4. Fraud

When an examination of an income tax return is based on a federal audit report and the fraud penalty has been assessed for federal purposes, the 50% fraud penalty will be assessed for State purposes. When the fraud penalty is assessed, no penalty for large tax deficiency, negligence or failure to pay shall be assessed with respect to the same deficiency; however, other penalties that apply, such as failure to file, will be assessed.

5. Frivolous Return

When it is discovered that a frivolous return has been filed you may be assessed up to a $500.00 penalty. A frivolous return is a return that meets both of the following requirements: (a) It fails to provide sufficient information to permit a determination that the return is correct or contains information which positively indicates the return is incorrect, and (b) It evidences an intention to delay, impede or negate this State or perports to adopt a position that is lacking in seriousness.

6. Insufficient Funds Penalty

When a bad check is written to the Revenue Department, you will be charged a bad check penalty of 10% of the check amount that was returned for insufficient funds. The bad check penalty cannot exceed $1,000.

7. Collection Assistance Fee

Any tax, penalty, and interest not paid within 90 days after the tax debt becomes collectible is subject to a 20% collection assistance fee. The fee will not apply if payments are being made pursuant to an installment agreement that became effective within 90 days after the debt became collectible.

8. Interest

Interest accrues on tax not paid by the original due date even though a taxpayer may have an extension of time for filing the return. Interest accrues on overpayments beginning 45 days after the latest of (1) the date of the final return was filed, (2) the date the final return was due to be filed, or (3) the date of the overpayment. The law requires the Secretary of Revenue to establish the interest rate on or before June 1 for the following six-month period beginning on July 1, and on or before December 1 for the following six-month period beginning on January 1. The rate set by the Secretary may not be less than 5% per year or greater than 16% per year.

9. Underpayment of Estimated Income Tax

Interest on the underpayment of estimated income tax is computed on Form D-422, Underpayment of Estimated Income Tax by Individuals. If interest on the underpayment is applicable, add the amount of interest to the tax due and include the full payment with the return.