Changes to Tax Penalties and Penalty Waivers

Through the process of designing the Iowa Department of Revenue’s new tax administration system, the Department reviewed how and when certain penalties are imposed or waivers would apply to those penalties in both the current system and what we desire in the new system. During this review, the Department identified legal requirements that, due to system constraints, legacy systems could not support without substantial manual intervention. As a result, the Department submitted a bill to the legislature to change penalties and penalty waivers. The legislature passed the bill, Senate File 608, and these changes will take effect July 1, 2021.

In general, the goal of these changes is to make the penalties and waivers easier to understand and implement and to answer questions on various topics. These changes are either taxpayer-neutral or taxpayer-friendly; the goal is not to create new scenarios where taxpayers will be subject to penalties they were not previously. As a reminder, these penalty and waiver provisions generally apply to all taxpayers for all tax types.

Before July 1, 2021, a taxpayer who was late in filing a return and had not paid 90% of tax due incurred a 10% penalty; if the taxpayer was late in paying tax due on that return, the taxpayer did not incur any additional penalty. If a taxpayer was late in paying tax due but was not late in filing a return, the taxpayer incurred a 5% penalty. A waiver may have applied if a taxpayer had not missed a return filing deadline in 36 months for tax types that require monthly, quarterly, or semimonthly return filings or payments. The law did not technically extend this waiver to late payments, but because the late filing of a “deposit form” also incurred a 10% penalty, a waiver was generally provided in practice. The application of penalties and waivers also varied depending on whether taxpayers filed returns or remitted payments electronically or by paper.

Senate File 608 removes penalties for failing to file a “deposit form.” The penalty for filing a late return is now 5%, and that penalty can be imposed simultaneously with the 5% late payment penalty if a taxpayer is late in filing and paying, resulting in a total penalty of 10% of the unpaid tax. The 36-month waiver also applies to both late payments and filings for applicable tax types. Other penalty waivers now apply to late payments that previously only applied to late return filings, such as destruction of records or death or serious illness of the taxpayer or an immediate family member. The Department also cleaned up other language about how penalties are calculated (removing “tax due or shown to be due” and referring instead to “unpaid” tax) and clarified other existing practices about how and when other potential penalties apply, including new penalties that were created last year and have not yet been implemented by the Department.

The Department clarified the application of payments to unpaid obligations, particularly in situations where tax, penalty, or interest was due for multiple tax periods. When there is unpaid tax over multiple tax periods, payments received are credited first to penalty and interest accrued and then tax due for the earliest period, then credited to each following tax period in chronological order. The Department also clarified that taxpayers can designate a period to which they wish a payment to apply, and that the Department will not reapply a prior payment if that prior payment was made on time. These changes to the Iowa Code are consistent with current Department practice.