Payments and Penalties

If debt on your credit card was cancelled, you must report the cancelled amount as income on Form 1040 line 21 unless you were insolvent immediately before the cancellation or the cancellation occurred in a Title 11 bankruptcy case.

If your lender agrees with a restructuring, workout that reduces the principal of your debt, the debt reduction is considered cancellation of debt and reportable as other income on Form 1040 line 21 and you may claim the principal residence exclusion.

Debt cancelled in a Title 11 bankruptcy case is not includable in your gross income if the cancellation is granted by the court or under a plan approved by the court. Certain losses, credits and basis of property must be reduced by the amounts excluded by cancellation of debt.

Interest is charged on any unpaid tax due from the due date of your tax return (usually April 15) until the date of payment. The interest rate is determined every 3 months. There are separate late filing and late paying penalties. If you file on time but do not pay on time, you will generally have to pay a penalty of one half of 1% of the unpaid tax due for each month or part of a month the tax remains unpaid. If you owe tax and don't file on time, the penalty for not filing on time will be separately calculated.

A tax return delivered to the IRS by U.S. mail after the due date is considered timely filed if the return was postmarked on or before the due date of the return. This rule includes postmarks supplied by any private delivery service designated by the Service. An income tax return postmarked April 15 and received by the IRS on April 19 is considered timely filed.

No penalty for late filing or late paying will be charged when a refund is due to you. The penalty for late filing and late penalty is based upon the unpaid taxes as of the due date of the return.

Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. That rate is determined every 3 months. For 2013 the interest rate is 3%. In addition, if you filed on time but did not pay on time, you will generally have to pay a late payment penalty of one half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, up to a maximum of 25%. The one half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy. If you owed tax and did not file on time, the penalty is even higher. The combined late filing and late payment penalty is 5% of the tax owed for each month, or part of a month, that your return was late, up to a maximum of 25%. If your return was over 60 days late, the minimum penalty is the smaller of $100 or 100 percent of the tax owed.

The date the IRS will accept a return as timely filed when mailed from overseas is if it is postmarked by midnight of the filing due date.

The IRS will waive penalties when allowed by law if you can show that you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. The IRS will also waive interest that is the result of certain errors or delays caused by an IRS employee.