Capital Tax Collection Bureau
Information Regarding Earned Income Tax (EIT) Interest and Penalty (I & P) & Quarterly (Estimated) Payments
When it comes to earned income tax (EIT), the most misunderstood, questioned and appealed matter is the application of interest and penalty (I & P) to tax paid delinquently. Hopefully this will provide information so you can understand why I & P is applied, how it was calculated, and whether you want to take the time to formally appeal it.
The law governing the application of EIT I & P
is as follows (as found in Pa. Act 511 of 1965, Section 13., VIII., (a.)):
“ (a) If for any reason
the tax is not paid when due, interest at the rate of six percent per annum on
the amount of said tax, and an additional penalty of one-half of one percent of
the amount of the unpaid tax for each month or fraction thereof during which
the tax remains unpaid, shall be added and collected. Where suit
is brought for the recovery of any such tax, the person liable therefor shall,
in addition, be liable for the costs of collection and interest and penalties
herein imposed. (emphasis added)”
As
the word “shall” indicates, the application of I & P is not
discretionary. Discretionary items
in the law are clearly marked by using the word “may” instead of the word
“shall.” This is often misunderstood
since both the Federal and State income tax have at least some penalties that
are discretionary (i.e., they do or do not apply depending on certain
circumstances, and the taxing body makes a decision to apply a penalty based on
a set of guidelines and/or policy).
You’ll
also note the words “for any reason the tax is not paid when due” in the
law, which describes when I & P shall apply. Not to be cavalier, but it’s a pretty good
bet that the “reason or reasons” a taxpayer believes he or she should not have
to pay I & P would be covered under “for any reason.” Again, this clearly supports the notion that
the legislation did not intend I & P to apply in some cases and not in
others. Another telltale aspect of this
“mandatory intent” is the very small penalty amount (1/2 percent per month or
fraction thereof). At the federal and
state level it is not uncommon to have a penalty of 5 percent per month, and
some penalties being as high as a flat 25%.
Also
please realize, that we have gone strictly by the law regarding I & P since
the Bureau’s inception in 1966 and for us to make an “exception” in your case
would be patently unfair. And where taxes
are involved, we’re strong believers that a large portion of “fairness” comes
from treating the same situations consistently.
Of course there are
times when I & P has been applied and it is removed or reduced, however,
this is limited to “Bureau error” (i.e. there was an error by the Bureau in the
calculation of the I & P; a.k.a., a math error). This is not to be confused with beliefs that the Bureau did not
react or respond in a manner that you felt it should have (e.g., you did not
know your tax obligations, you did not receive a notice, you do not believe the
notice was timely). By law, the Bureau
is not required to send you a tax return for the tax to be due, and for it to
be due timely. Of course, the practical
matter is that we try to inform every identified taxpayer about his or her
obligations in order to foster compliance with the tax law.
It
has been established that the interest portion of the I & P is 6.0% per
annum and the penalty portion is ½ per cent per month (which also equates to
6.0% for 12 whole months or a year).
When our Bureau calculates I & P, we do so as if it was a combined
12% per annum. A lot of times we do
separately list the amount of interest versus penalty that is due. However, since they are, in affect, the same
rate, if you have a need to distinguish them, just divide their total by 2.
The Pa. state enabling law
permits, as an option, a taxing jurisdiction to require individual quarterly
payments of tax where the employer does not withhold it. Where these quarterly or “estimated”
payments are not required, all tax must be paid by the tax filing due date,
which is the 1st business day after April 14th following
the tax year (usually April 15). Where
quarterly payments are required, unless actual circumstances dictate otherwise,
¼ of the annual payment that is calculated or estimated to be due is payable
with each quarter’s payment. The first
quarter payment is due by April 30; the 2nd quarter payment is due by July 31;
and the 3rd quarter payment is due by October 31 of the tax year;
the 4th quarter payment is due January 31, following the tax year. You may note that this pay schedule differs
(is more liberal) than that required for federal and state income tax
purposes.
We provide 4 factors that, in certain cases, entirely alleviate the need to pay unwithheld tax quarterly, even where it is otherwise required by the taxing jurisdiction, but in any case will provide a certain minimum that needs to be paid timely even in situations where the exact tax liability is not known for the current tax year. These are sometimes described as “safe harbors”. Please note that we have no exceptions to these requirements based on whether a taxpayer’s taxable income is from farming and/or fishing. The 4 factors are as follows:
1. If the taxpayer was not mailed a set of Form 521s (payment coupons and instructions for quarterly payments of tax) for the tax year, no interest and penalties will apply for failure to make timely, sufficient, quarterly tax payments. We do this because someone can move into an area that requires these payments, or their circumstances change (e.g., they have new or increased income or net profits that are not subject to withholding) and they were not required to do so in the previous year. A key point is that it is not required that the taxpayer receives this mailing, but just that it is made.
3. Or, an amount equal to at least 100% of the taxpayer’s prior year local EIT liability (as adjusted for tax rate changes to the current tax year) is paid through a combination of employer withholding or timely, direct, quarterly payments is paid for the current year.
4. Or, at least 80% of the taxpayer’s current year local EIT liability is paid through a combination of employer withholding or timely, direct, quarterly payments for the tax year.