Penalties and Interest

There was a time in the not too distant past when Alabama taxpayers and practitioners could virtually ignore the consequences of underpayment penalties as well as interest and penalties on late payments. The laws were on the books; but were very casually enforced if at all. The situation has definitely changed. In the current environment, the state is desperately short of funds, and the Department of Revenue is very aggressive in pressing interest and penalties to the full extent of the law.

Penalty for Underpayment of Estimated Taxes

Alabama Code §40-18-80(a) imposes a penalty on taxpayers who fail to pay in at least 90% of their current year tax liability through a combination of withholding on wages and timely-paid estimated tax payments. (Alabama farmers may substitute 66.67% for 90% in the preceding sentence.) The penalty is the lesser of

The excess of 90% (or 66.67%) of the current year tax liability over taxes paid and withheld, or
6% of the excess of taxes due over taxes paid and withheld.

Assume, for example, that an Alabama taxpayer has a total Alabama tax liability for 2003 of $10,000, but her withholding and estimated tax payments for the year are only $8,000 and none of the exceptions below apply. Her penalty for underpayment of tax will be the lesser of

$1,000 [(90%*10,000) - $8,000], or
$120 [6%*(10,000 - 8,000)]

Since the lesser of the two is $120, that will be her penalty amount.

The underpayment penalties do not apply in those years where

The death of the taxpayer occurs,
The taxpayer has paid in, through withholding and timely-paid estimated tax payments, an amount equal to at least 100% of the prior year's total tax, or
The prior year's tax liability was zero (other than as a result of of a net operating loss carryback to the prior year).

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Interest on Late Payment of Tax

The Department of Revenue has the authority under §40-1-44(a) to charge interest on unpaid taxes or any other amounts due to the Department at the rate set by the U.S. Secretary of the Treasury under Internal Revenue Code §6621. Interest is computed on such late payments of income taxes from the original due date of the return.

Late Payment Penalty

If an Alabama taxpayer fails to pay income taxes when due, the DOR imposes a late payment penalty of 1% for each month, or fraction of a month, that the payment is late, up to a maximum of 25%. The late payment penalty is in addition to the interest discussed above (Regulations 810-14-1-.30).

For example, assume that a taxpayer files his 2002 return on the due date of April 15, 2003 showing a balance due of $1,000; but he doesn't pay the balance due until September 20, 2003. In addition to the tax due, he must pay a late payment penalty of $60 (6%*1,000) plus interest at the statutory rate.

This page last updated 12/28/03

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