Understanding New York State Tax Penalties: A Comprehensive Guide

If you fall behind on your New York State taxes, file incorrectly, or engage in fraud, the Department of Taxation and Finance (DTF) may add a wide range of penalties to your tax bill. By understanding the penalties you may be charged and learning more about the Department’s expectations for taxpayers, you can stay compliant with all state tax requirements and minimize the risk of penalties.

Are you currently facing NTF tax penalties? Need help applying for abatement or appealing the penalties? Then, Contact us at the Timothy S. Hart Law Group today.

Key Takeaways

• The NY DTF assesses penalties for filing late, paying late, underreporting income, or committing fraud.
• Reasonable cause penalty abatement may be an option for those who have a legitimate reason for falling behind.
• In addition to civil penalties, tax fraud may result in criminal charges, prison time, and monetary fines.

Payment-Related Penalties

Many penalties are rooted in issues relating to payments—payments that are late, incorrectly estimated, or otherwise outside of the Department’s requirements.

Interest

While interest isn’t technically a penalty, it is an expense that goes above and beyond your base tax bill, so it is often viewed in a similar light as penalties. Interest differs from penalties in one key way: while penalties may be waived in certain circumstances, interest is a separate fee and is rarely waived. It is viewed as a charge for the use of the state’s money.

Interest rates are updated quarterly. In the first quarter of 2025, the interest rate for late income tax payments to the DTF was set at 9.5%. Interest compounds daily, so if you owe a substantial amount to the state, interest can snowball quickly. Note that the NY DTF uses different interest rate calculations than the IRS.

Late payment penalty

Should you fail to pay your taxes when they are due, the Department adds interest and a late payment penalty to your account. The penalty is 0.5% of the unpaid amount for each month or partial month that you have a balance. The penalty is capped at 25% of the initial tax bill.

For instance, if you owe $100,000, the monthly late penalty is $500, but over time, the penalty can get up to $25,000.

Penalties for underpayment of estimated taxes

If you underpay your estimated taxes, either via estimated tax payments or withheld taxes, you may be subject to an underpayment penalty. The penalty applies if your total payments are not at least 90% of the tax on your current year’s return or 100% of the tax shown on your previous year’s return—whichever number is smaller.

The penalty is the federal short-term interest rate plus 5.5 percentage points. Both the federal interest rate plus the additional percentage rate change quarterly. However, the minimum penalty is 7.5%.

Accuracy and Compliance Penalties

There are several New York State penalties related to a taxpayer’s non-compliance and inaccuracies on their tax records or documents.

Late filing penalty

Filing your taxes late comes with a much heavier penalty than paying your taxes late. The penalty is 5% of the amount due for each month or partial month that the return is late. The penalty is capped at 25% of the amount due. Returns that are more than 60 days late have a minimum penalty of $100.

If you owe $100,000, for example, the monthly penalty is $5,000. After five months of not filing, the penalty can be up to $25,000.

Incorrect tax calculation penalty

New York State charges a penalty for incorrect tax calculations if the tax reported on your return is less than what you actually owe by 10% or $2,000—whichever is greater. The penalty is 10% of the difference between the tax you reported and what you owe.

For example: you report on your tax return that you owe $2,000 in New York State taxes. However, you actually owe $4,000. You would have to pay both the additional $2,000 and a $200 penalty—10% of the $2,000 difference.

Penalties for negligence, fraudulent returns, and frivolous returns

These are three separate penalties that apply to different situations.

• Negligence: If your return includes underreported tax caused by negligence but not fraud, the penalty is 5% of the difference between what you owe and what you reported. You must also pay an additional 50% of the interest due on negligence-related underpayments.
• Fraud: If you owe additional taxes due to fraud, the penalty is two times the difference between what you owe and what is shown on your return.
• Frivolous return: For any taxpayer who files a frivolous tax return, the State can charge a penalty of up to $5,000. Frivolous returns include those that do not have the necessary information to determine whether or not the return is accurate, have obviously incorrect information, or intentionally delay the processing of the return.

Withholding tax non-compliance

If you have employees in New York, you must withhold state income tax from their paychecks and remit it to the DTF. Businesses that withhold taxes to pass on to the Department of Taxation and Finance must meet strict filing requirements to avoid penalties.

If a business fails to file Form NYS-45, Quarterly Combined Withholding, Wage Reporting, and Unemployment Insurance Return, the penalty is the greater of $1,000 or $50 per employee listed on the last form filed. The penalty is capped at $10,000 per quarter. The penalty may be abated if you file within 30 days of notification.

If a business does not provide complete and accurate withholding information, they may be charged a penalty of $100 for each employee for whom they provided incorrect or incomplete information. If they provide this information but do so late, the penalty is $50 per employee for whom the information is late.

A business that does not provide accurate quarterly withholding information on NYS-45, the penalty is 5% of the quarterly withholding tax liability. This penalty is capped at $10,000 per quarter.

Sales and Use Tax Penalties

Businesses that sell taxable items or services are required to collect and pass on sales and use tax on certain transactions. There are a number of reasons business owners may incur penalties in this area.

Failure to register

You must have a Certificate of Authority to collect and pass on sales tax, and you must collect sales tax to sell taxable items or services. The penalty is up to $500 for the first day on which sales are made in addition to $200 for each additional day. This penalty is capped at $10,000.

Failure to collect sales and use tax

You may be subject to fines and jail time for failing to collect state and local sales tax on transactions involving taxable goods or services. If you have not been collecting sales tax, you may qualify for the state’s Voluntary Disclosure Program.

Inadequate record-keeping

There are several penalties related to accurate record-keeping in New York State:

• Not keeping records in an auditable form: Up to $1,000 for each quarter or partial quarter in which the records are not auditable.
• Failing to maintain records or provide them to the Department: Up to $1,000 for the first quarter and $5,000 for each subsequent quarter or partial quarter in which records are not maintained or furnished
• Not making electronic documents available in an electronic format: Up to $5,000 for each quarter or partial quarter in which you do not make the documents electronically accessible

Failure to pay or pass through taxes

Penalties vary depending on the infraction, but can quickly add up for non-compliant businesses:

• Filing a return on time without paying the tax due: 10% of the amount due for the first month plus an additional 1% for each additional or partial month; this maxes out at 30%
• Failing to report more than 25% of the tax required to be included on your return: 10% of the tax you did not report
• Fraudulently failing to pay or pass-through tax: Twice the amount of the tax not reported, as well as interest on the unpaid tax at a rate of 14.5% or the rate set by the Tax Commissioner—whichever is higher.

Criminal Penalties

When errors or underpayments are the result of intentional criminal acts, rather than errors or negligence, you could be facing criminal penalties instead of just civil penalties.

Criminal tax fraud may be charged in the first, second, third, fourth, or fifth degree. The most severe is first-degree criminal tax fraud, which is reserved for those who underpay by at least $1,000,000 or receive more than $1,000,000 in overpayments from the state. Prison sentences range from one to 25 years in prison in addition to monetary fines.

The least severe is criminal tax fraud in the fifth degree, which may result in up to one year in jail. This charge includes anything that is considered a tax fraud act, like providing false information on a tax return or withholding sales tax from the government. Second, third, and fourth-degree charges fall in the middle of these two in terms of severity and punishments.

Penalty Abatement and Waivers

The Department of Taxation and Finance will grant penalty relief in certain cases. In some of the situations we discussed above, the state waives penalties if the situation is rectified in a timely manner.

Those who have a tax attorney handling their case can also have their attorney request penalty relief via their Tax Professional Online Services Account. You can also request penalty abatement if you can show reasonable cause for why you failed to file or pay on time.

Compliance with New York State tax laws can save you a substantial amount of money, time, and stress. Stay on top of due dates and filing requirements with the help of a tax professional who can both keep you on track and help you navigate tax issues if they arise. Call Timothy S. Hart Law Group or reach out online to set up a time to meet with our team.