How to Compute IRS Interest and Penalties for Unreported Interest Income

Interest income is any interest earned on financial products in your investment portfolio. Normally, your financial institution will mail you a Form 1099-INT at the end of each year, with the amount of interest income prominently listed, so you may use this information in your tax return. There is, however, some interest income you are responsible for reporting yourself.

• 1

  Calculate the amount of unpaid tax. Input your interest income into your tax return's 1099 and calculate how much taxes you owe on the unreported interest income.

• 2

  Compute your penalty for paying this tax late. Your late payment penalty is half of 1 percent of your owed taxes for each month or part of a month after April 15 (when your taxes were due). This IRS penalty is capped at 25 percent of your owed taxes.

• 3

  Add your penalty for inaccuracy. The IRS may tack on a 20 percent penalty if your interest income taxes mean that you underpaid your income tax by 10 percent or $5,000 (whichever is larger).

• 4

  Think about whether the IRS may charge you with a fraud penalty. If the IRS believes you didn't report your missing interest income due to some sort of fraud, it will levy a 75 percent penalty on your unpaid taxes.