1. General
The North Carolina Statutes provide both civil and criminal penalties for failure to comply with the income tax laws.
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.
2. 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 without payment of the tax shown due, both the late filing and late payment penalties will be assessed at the same time.
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 percent of the tax not paid by the original due date of the return and will apply on any remaining balance due if the tax paid by the original due date of the return is less than 90 percent of the total amount of tax due. If the 90 percent 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 percent late-payment penalty if payment of the tax is not received within 45 days of the assessment.
3. Negligence Penalties
When there is an understatement of taxable income equal to 25 percent or more of gross income, the 25 percent negligence penalty will be assessed. When the percentage of understatement of taxable income is less than 25 percent, the 10 percent negligence penalty may be applied. The application of the 10 percent 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 percent negligence penalty will be assessed for State income tax purposes, unless the 25 percent negligence penalty applies.
A negligence penalty cannot be assessed when the fraud penalty has been assessed with respect to the same deficiency. There is no minimum dollar amount of negligence penalty.
4. Failure To Report Federal Changes
When a taxpayer fails to report federal changes within six months from the date the Internal Revenue Agent’s report was received, 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.
5. 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 percent fraud penalty will be assessed for State purposes. When the fraud penalty is assessed, no penalty for 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.
6. Collection Assistance Fee
Any tax, penalty, and interest not paid within 90 days after the tax debt becomes collectible is subject to a 20 percent 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.
7. 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 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 percent per year or greater than 16 percent per year. The current rate of interest may be obtained by calling the Department of Revenue or from the Department’s website.
8. 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 the interest to the tax due and include the full payment with the return. (See XX. Interest on Underpayment of Estimated Income Tax for explanation.)
9. Waiver of Penalty
Any penalty may be waived by the Secretary of Revenue pursuant to the Department of Revenue penalty policy. A request for waiver or reduction of penalty must be in writing and must include an explanation for the request. Interest cannot be waived or reduced.