What
penalties are applied by the IRS if you fail to file your
income tax return on time (without qualifying for a filing
extension) or if you fail to pay your taxes on time?
Failure to pay. Separate penalties apply for
failing to pay and failing to file. The failure to pay penalty
is the “gentler” of
the two, running at 1/2% for each month (or part of a month)
the payment is late.
For example, if payment is due April
15 and is made May 20, the penalty is 1% (1/2% times 2
months (or partial months)). The maximum penalty is 25%.
The failure to pay penalty is based on the
amount shown as due on the return (less credits for amounts
already paid, e.g., via withholding or estimated payments),
even if the actual tax bill turns out to be higher. On the
other hand, if the actual tax bill turns out to be lower,
the penalty is based on the lower amount.
For example, if
your payment is two months late and your return shows that
you owe $5,000, the penalty is 1% (see above), which equals
$50. If you are audited and your tax bill increases by
another $1,000, the failure to pay penalty is not increased
because it's based on the amount shown on the return as due.
On the other hand, if the audit reveals that your tax due
should have only been $4,000, the penalty is reduced to $40.
Failure
to file. The failure to file penalty, also known
as the delinquency penalty, runs at the more severe rate
of 5% per month (or partial month) of lateness to a maximum
of 25%. If you obtain an extension for your filing due
date, you are not filing late unless you miss the extended
due date. However, a filing extension does not apply to
your responsibility for payment.
If the 1/2% failure to pay penalty and the
failure to file penalty both apply, the failure to file penalty
drops to 4.5% per month (or part) so the total combined
penalty remains at 5%. The maximum combined penalty for
the first five months is 25%. Thereafter the failure
to pay penalty can continue at 1/2% per month for 45
more months (an additional 22.5%). Thus, the combined
penalties can reach a total of 47.5% over time.
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The failure to file penalty is also more severe
in that it is based on the amount required to be shown on
the return, and not just the amount shown as due. (Credit
is given for amounts paid, for example, via withholding or
estimated payments. So if no amount is owed, there is no
penalty for late filing.)
Thus, for example, if a return is filed three
months late showing $5,000 owed (after payment credits),
the combined penalties would be 15%, which equals $750.
If the actual tax liability is later determined to be an
additional $1,000, the failure to file penalty (4.5% × 3
= 13.5%) would also apply to this amount for an additional
$135 in penalties.
A minimum failure to file penalty
will also apply if you file your return more than 60 days
late. In this case, the failure to file penalty is at least
$135. Even here, however, if you owe no taxes, there is no
penalty.
Reasonable cause. Both penalties
may be excused by IRS if your lateness is due to “reasonable
cause.” Typical qualifying excuses include death or
serious illness in the immediate family, postal irregularities,
or bad advice (e.g., you needn't file) given to you by your
tax advisor or IRS itself.
Interest is assessed at a fluctuating rate
announced by the government apart from and in addition to
the above penalties. Furthermore, in particularly abusive
situations involving a fraudulent failure to file, the late
filing penalty can jump to 15% a month, with a 75% maximum.
If you have questions on whether your particular
situation could qualify as reasonable cause, please call us. |
