IRS Failure-to-File Penalty: The Penalty for Filing Late or Not Filing

While some low-income individuals don’t necessarily have to file tax returns, most people are required to file and pay their taxes by the due date (generally April 15th) each year. 

If you don’t file your tax return on time, you risk receiving a failure-to-file penalty from the Internal Revenue Service (IRS). You may also receive a failure-to-pay penalty if you owe taxes and don’t pay them by their due date.

This article will explain what the IRS’s failure-to-file penalty is, how much it costs, and how to calculate it. It will go over the differences between the failure-to-file penalty and the failure-to-pay penalty, circumstances in which you can request to have the failure-to-file penalty abated, and how to avoid receiving the penalty in the first place. 

What Happens If Your Taxes Are Late?

If your tax return is sitting half-finished in a junk drawer or you closed the e-filing program when it told you how much you owe, and now visions of prison life are dancing in your head, relax. While you can accumulate hefty fines for not filing your taxes on time, you probably won’t face jail time as long as you file your return as soon as possible (and aren’t intentionally cheating on your taxes). 

If you miss the deadline for filing your tax return, the IRS may issue a substitute for return. Then, the agency will send you a notice or letter informing you that you owe a failure-to-file penalty. As long as you take immediate action to rectify the situation–including filing your return and paying any unpaid taxes, interest, and penalties–and take steps to ensure that you don’t miss future tax deadlines, the IRS should work with you to resolve the issue.

What Is the IRS Failure to File Penalty?

The failure-to-file penalty is a fine that the IRS charges anyone who doesn’t file their taxes on time. Both individuals and businesses can receive a failure-to-file penalty.

How Much is the Penalty for Filing Taxes Late?

The failure-to-file penalty is a percentage of your overdue taxes. The standard rate is 5% of your unpaid taxes per month that your tax return was late, and it is capped at 25% of your unpaid taxes.

Even if you don’t have the money to pay your taxes, you should still file them. The failure-to-file penalty is significantly higher than the failure-to-pay penalty, and not filing taxes can end up costing you a lot more than your original tax bill.

For instance, if you owe $5,000 and you don’t file, the failure-to-file penalty can get up to $1,250. Then, on top of that, you’ll also incur interest and late payment penalties. Your $5,000 bill can quickly get past $6,000, and it continues climbing until you pay. 

How to Calculate the IRS Failure to File Penalty

You can calculate the failure-to-file penalty yourself, although the IRS will send you a notice letting you know if you owe any penalties for late filing.

The IRS determines the amount of the failure-to-file penalty using the following information:

• How late you filed your tax return
• How much you owe in taxes on the original due date

The failure-to-file penalty is charged at a rate of 5% of your unpaid taxes for each month (or part of a month) that your tax return is late. Luckily it’s not charged indefinitely and maxes out at 25% of the amount of taxes you owe. 

However, if your return is more than 60 days late, the minimum penalty for late filing will be the lesser amount of:

• $435 (for returns due in 2020, 2021, or 2022) 
• $450 (for returns due in 2023) or
• 100% of the tax owed

You will also have to pay the IRS a failure-to-pay penalty. 

Failure to Pay Penalty

If you file your tax return late and owe taxes, you may receive a failure-to-pay penalty on top of the failure-to-file penalty. The failure-to-pay penalty is calculated based on:

• How long overdue your tax payment is, and whether you
• Failed to pay taxes shown on your return or 
• Failed to pay taxes that weren’t reported

The amount of the penalty for late taxes can vary. The standard failure to pay penalty is 0.5% per month (or part of a month) that your taxes are overdue and maxes out at 25% of your unpaid taxes.

However, if you filed a return on time and are approved for a payment plan, the failure to pay penalty is reduced to 0.25% of your unpaid taxes throughout the duration of the payment plan. 

On the other hand, if you receive a notice from the IRS that they intend to levy your property (legally take your property as payment for a tax debt) and you don’t pay your taxes within 10 days of getting the notice, the amount of the failure to pay penalty increases to 1% of the taxes owed. 

Difference Between Failure to File and Failure to Pay

The failure-to-file penalty is calculated based on how far past the due date you filed your tax return and how much you owed in taxes on the original due date, and it is generally charged at a rate of 5% of your unpaid taxes per month.

The failure-to-pay penalty is calculated by determining how overdue your taxes are and whether you filed a return but failed to pay taxes or failed to report taxes, and is generally charged at a rate of 0.5% of your unpaid taxes per month.

What if you are charged with both a failure-to-file and a failure-to-pay penalty for the same month? In that case, the failure-to-file penalty (5%) is reduced by the amount of the failure-to-pay penalty (0.5%) for each month that both apply. 

That means that you will end up paying 5% of the amount of your unpaid taxes for each month or part of the month that your tax return was late, but 4.5% of the payment will go toward the failure-to-file penalty, and 0.5% will go to the failure-to-pay penalty. 

You will only pay the failure-to-file penalty for each month (or part of a month) your return was late, with a limit of 25% of the taxes you owe. However, after the IRS stops charging your failure-to-file penalty, they will still continue to assess the failure-to-pay penalty until your overdue taxes are paid. The failure-to-pay penalty is also limited to 25% of your unpaid taxes.

For example, let’s say that you filed your 2021 tax return 9 months after it was due and owe $1,000 in taxes. Since your tax return was filed over 60 days late, you would owe the IRS:

• $435 penalty for filing more than 60 days late
• Any accrued interest 
• Failure-to-pay penalty until your taxes are paid in full or the penalty reaches $250 (25% of taxes owed)

As this example shows, IRS penalties and interest can add up, and you can end up having to pay much more than you would have if you had filed your return and paid your taxes on time.

Note that the failure-to-file penalty is 5% per month and can get up to 25% of your tax due. For this tax bill, that would be $250. However, as indicated above, the IRS assesses a minimum penalty of $435 or 100% of the tax due (whichever is greater) after you’re 60 days late. Thus, in this example, the $435 penalty applies instead of the $250 max penalty. 

Interest on IRS Penalties

The IRS charges interest for both failure-to-file and failure-to-pay penalties. Interest is due as it accrues. Interest typically starts accruing from the date your tax return is due until the date payment is made in full, but it depends on the penalty.

The IRS interest rate is the federal short-term rate plus 3% and compounds daily. 

The IRS applies your payments first to overdue taxes, then to penalties, then to interest. 

When the Failure-to-File Penalty Can Be Abated

There are certain circumstances in which the failure-to-file penalty can be abated, including if you have a good reason for not filing on time if you are eligible for a first-time abatement, and if you received a failure-to-file penalty during the COVID pandemic.

Reasonable Cause

If you can prove that you intended to file on time and can meet one of the IRS’s reasonable cause criteria, then you may be able to have your failure-to-file penalty reduced or removed. 

Reasonable causes that the IRS may accept include:

• Fires
• Natural disasters such as earthquakes or hurricanes
• Civil disturbances such as protests or riots
• Inability to access necessary records
• Death or illness of yourself or your immediate family
• System issues when attempting to file online

First-Time Abatement

If you have historically complied with tax laws and have filed the same type of return for the previous 3 years, you may qualify for a first-time abatement. If you are approved for a first-time abatement for a failure-to-file penalty, you should be aware that you will still need to pay your failure-to-pay penalty and any accrued interest. 

COVID Pandemic

The IRS is providing automatic refunds or credits to eligible taxpayers who failed to file taxes on time in 2019 and 2020 due to the COVID pandemic. 

Even if you don’t have the money to pay your taxes, you should file all of your tax returns as soon as you can to stop failure-to-file penalties from accruing. While you will still have to pay a failure-to-pay penalty, it costs less money per month than the failure-to-file penalty. 

If you are owed a refund, the IRS generally won’t charge you a failure-to-file penalty for filing late. But if you wait too long to claim your refund, you may forfeit it to the IRS! You only have three years from the due date to claim tax refunds. 

How to Avoid the Failure-to-File Penalty

The best way to avoid the failure-to-file penalty is to file your tax return and any required information returns by their due date. You should also double-check that your tax return contains accurate information. 

If you need more time to file your taxes, you can apply for an extension, which typically extends your due date by six months. Then, as long as you file your return by the extended due date, you won’t receive the failure-to-file penalty. 

However, keep in mind that an extension changes the due date for filing your return. It does not give you extra time to pay your taxes. 

Even if you apply for a filing extension, you should estimate and pay your taxes on their original due date. Otherwise, you will receive a failure-to-pay penalty. If you don’t have the money to pay your taxes when they’re due, you should apply for a payment plan. You can attach the payment plan request to your tax return or apply online after you file. 

Get Help With Late Filing Penalties

If you’ve already received IRS penalties, a tax attorney can help you apply for a first-time penalty abatement. They can also help you file your taxes, amend previously filed returns, dispute tax assessments, and set up payment plans to stop penalties from accumulating. If needed, they can also help you create a tax plan to help you avoid penalties in the future. 

To get help now, reach out to us at the W Tax Group today to find out how we can help with your unique tax needs. We can help you deal with the IRS or state tax agencies. Don’t let the penalties keep climbing — contact us for help today.

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Lead Tax Attorney at The W Tax Group

Stephen A Weisberg