If you don’t file your taxes on time, you’ll end up facing consequences. The IRS will charge penalties and interest for not filing or paying taxes when due. Your personal assets and bank accounts may also be seized to pay past due taxes. It’s important to understand what happens if you receive a failure to file penalty.
12 Facts About the IRS Failure to File Penalty
- Penalties and Interest Accrue from the Due Date
- The Penalty is 5% Each Month
- Failure to Pay Reduces Failure to File Penalty
- Penalty is Increased for Each Full and Partial Month
- Maximum Penalty of 25%
- Additional Penalty After 60 Days
- Interest Compounds Daily
- Waive Penalty for Reasonable Causes
- No Penalty If No Taxes Due
- Filing Past Due Returns for a Refund
- Unclaimed Refunds Lost After Three Years
- The IRS May Accept an Installment Agreement
The Internal Revenue Service (IRS) is the Federal tax agency that oversees taxation in the United States. This includes enforcement of tax laws and collecting unpaid tax debts. Taxpayers file a tax return with the IRS that details their income, exemptions, credits, and deductions along with supporting information. Some receive a tax refund for overpaying, others underpay and face penalties.
The IRS can place liens on personal and business property and eventually levy or seize those assets in order to sell them and apply the proceeds to the tax debt. You can file a return online, using free tax preparation companies or software, or by mail. The IRS accepts many different payment options ranging from online, Electronic Federal Tax Payment System (EFTPS) or mobile apps, direct from a bank account, credit and debit cards, checks or money orders by mail, and even cash in some locations.
What Happens if You File Taxes Late?
The IRS has the power to place a lien on personal property when you owe a tax debt. A lien is a public notice that the IRS has an interest in property that a taxpayer owns. This can come with many disadvantages — it can prevent you from selling property, for example. When it comes to collecting on a tax liability, the IRS has the backing of the federal government and special privilege, such as first right to property. In cases where a taxpayer refuses or doesn’t pay their taxes by specified due dates, even after IRS notices and warnings, the IRS can levy property. This tax levy can range from physical property such as real estate and vehicles to bank accounts and investments. The IRS can garnish wages to satisfy tax debts. Even declaring bankruptcy might not alleviate the debt of certain tax liabilities.
It is best to file on time and pay taxes when due. However, if you cannot file on time, you may qualify for some extensions or reasonable cause waivers. A late filing carries a heavy penalty and taxpayers should file as soon as possible, even if they cannot make the full payment of taxes due at once. Making arrangements to pay the IRS can provide the benefit of possibly removing liens and even recovering seized assets in some cases.
1. Penalties and Interest Accrue from the Due Date
Federal income taxes must be filed by the due date. For individuals and those with disregarded business entities, the deadline for income taxes is mid-April (usually on the 15th). Due dates for some business tax returns or information returns vary. Generally, a business must file their tax returns by the middle of the third month after the end of their tax year. Businesses that follow the calendar year must file by the middle of March while a business with a fiscal year ending in June might file by September 15th. Individuals and businesses who typically owe income taxes must pay certain taxes by applicable deadlines. This can include estimated quarterly taxes as well as monthly or semi-weekly employment taxes.
Interest is compounded daily on both the tax debt owed and any penalties that apply. The interest rate is determined by the IRS quarterly and is usually the federal short-term rate plus a few percentage points. Recently, the IRS announced an increase in interest rates. Individuals can expect to pay 6% interest compounded daily on overdue tax and penalties. Some businesses may face up to 8%. This is up from the 2018 rate of 5% for individuals and 7% for business.
2. The Penalty is 5% Each Month
The IRS charges a Failure to File Penalty of 5% to unpaid tax after the filing due date. This penalty is applied every month and can increase to a maximum of 25% of your balance. The total tax due is calculated after withholding, estimated tax payments, and some refundable credits. You may be able to waive this penalty for reasonable causes or even file for an extension of up to six months. Because this penalty is so high and applies each month, it can quickly increase the total amount owed. That is why it is so important to file your tax return. If you are in this situation, the best thing you can do is hire a professional tax advisor who can help you with a failure-to-file and underpayment penalty.
3. Failure to Pay Reduces Failure to File Penalty
Failing to file and pay income taxes can cause your unpaid tax balance to accrue IRS penalties of up to 5% combined. The failure to pay penalty is 0.5% of the unpaid tax due each month up to a total of 25%. When both the failure to file and failure to pay penalties apply, the combined penalty reduces the failure to file penalty from 5% to 4.5%. You will be charged both penalties though, for the combined 5% which increases each month. The failure to file penalty, in a combined situation, will peak at 22.5% after five months while the failure to pay penalty will keep applying to its maximum of 25%. This can equal a combined penalty of 47.5%!
4. The Penalty is Increased for Each Full and Partial Month
The penalties will start applying on the first day that they are late and continue until they are paid in full. The IRS will not prorate the penalty for a partial month. Each month or partial month will see the full penalty applied for that month. With a 5% penalty applied for failing to file income taxes each month past the due date, you will reach the maximum penalty very quickly — which is also applied each month as a penalty. This is why it is important to quickly file your income taxes with the Internal Revenue Service, even if they are late. Depending on your unique tax situation you may qualify for waivers or installment agreements for the taxes you might owe.
5. Maximum Penalty of 25%
Failing to file a return or requesting an extension of time to file a return by the due date can cause the IRS to apply a penalty to tax owed. The failure to file penalty is 5% of the unpaid tax each month or partial month. The maximum penalty for failing to file is 25%, which only takes five short months to reach. However, if there is also a failure to pay penalty applied each month, the IRS reduces the failure to file penalty. The failure to file penalty is reduced to 4.5% and the failure to pay penalty of .5% is added — for a total of 5% penalty each month. In the case of combined penalties, the failure to file penalty will max out at 22.5%. The failure to pay penalty will keep increasing each month to its maximum penalty of 25%, leading to a combined maximum penalty of 47.5% each month for amounts unpaid. In some cases, or after the IRS has sent notices, the failure to pay penalty may increase to 1%.
6. Additional Penalty After 60 Days
There is an additional penalty applied to taxes owed when taxpayers fail to file. This penalty is applied after 60 days and is either $210 for 2019 or 100% of the tax owed, whichever is less. This means if you owe less than $210 and fail to file for 60 days past the due date and have no reasonable cause, you would have a penalty up to $210 applied to the tax liability. This penalty amount has increased over recent years. From 2016 to 2017, the 60-day late penalty was $205, and was only $135 between 2009 and 2015.
7. Interest Compounds Daily
Another major issue with failing to file is that interest compounds daily. This means your tax liability can grow very large, very quickly. Penalties will keep piling up if you wait to file. If you owe a tax debt to the IRS, it may save money in the long run to consider options such as loans or using your credit card. There are many options if you cannot pay the entire debt right away. First, you need to file your tax return if you have not yet. Consult with one of our experienced tax professionals to get the best chances of claiming exemptions, deductions, credits, and other options for tax debt relief.
Penalties and interest on past due amounts from previous years can lead to very large tax debts which may seem unmanageable. It is important to know that there are arrangements you can make with the IRS. If you cannot reasonably make payments, the IRS will try and work with you.
8. Waive Penalty for Reasonable Causes
Situations can occur which prevent taxpayers from filing on time. Tax law allows waivers for reasonable causes. You must be able to prove the circumstances that kept you from filing before the due date. You may be eligible for a waiver due to medical reasons or incapacitation, natural disasters, or other reasons, depending on the situation. There may also be the possibility of a first-time penalty abatement. U.S. citizens and members of the armed forces outside of the U.S. may qualify for a two-month filing extension with an additional four months if needed.
9. No Penalty if No Taxes Due
The good news is that you should not see a failure to file penalty if you do not owe any taxes in a given tax year. There are still plenty of reasons to file your tax returns, even if you had no income or might not otherwise be required to file. Still, if you do not owe taxes, you will not have the penalties to worry about. There are also cases where you may become subject to additional taxes, such as with the Net Investment Income Tax or the Alternative Minimum Tax for taxpayers over certain income thresholds.
In some cases, the IRS will file a substitute return for a taxpayer who fails to file. This can be done to assess a tax debt due and to start the collections process. When the IRS prepares a substitute return, it may not include all of the exemptions, deductions, and credits you may be qualified to receive. For this reason, if you owe the IRS or received a notice that you owe, you may want to double check the return. If you have not filed yet, do so quickly to avoid the failure to file penalty. A knowledgeable tax professional can help determine ways to decrease your tax debt and can help you make arrangements for any past due amounts that are accurate. If you have no tax liability due after filing a correct return, you should not have a failure to file penalty.
10. Filing Past Due Returns for a Refund
Those who are eligible for refunds can usually avoid paying a failure to file penalty when they file their income taxes. This may make it tempting not to file if you do not owe any taxes on federal income. You can claim any refund you are due after the due dates for filing within certain time periods. There is no penalty for a late filing if you are getting a refund. An important note is that the IRS statute of limitations for collecting unpaid tax only starts once an income tax return is received, so failing to file can actually keep that clock from starting.
11. Unclaimed Refunds Lost after Three Years
Typically, you can file an income tax return and obtain any refund due. Those taxpayers who owe no tax debt will not face a failure to file penalty. Because of this, you can technically claim your refund at any time. You may still want to file a tax return for your income taxes by the specified due dates to avoid any penalties that could potentially apply if you ended up owing taxes. For example, recent changes to tax laws may change how certain taxes need to be calculated and some taxpayer withholdings may need to be adjusted. Generally, you can claim refunds up to three years past. After three years, the IRS will turn over the unclaimed amounts to the Treasury.
12. The IRS May Accept an Installment Agreement
The IRS may be willing to negotiate payment arrangements for tax debts. Even if a tax debt is going to accrue, it is best to file your income tax return with the IRS and make payment arrangements. The options available depend on the tax amount owed and the ability of the taxpayer to pay. In some cases, you may be able to combine methods, such as using credit cards or personal debt to lower your tax liability to a level suitable for payment arrangements. Anything is better than letting penalties continue to accrue on an unpaid IRS debt. Be sure to file your income return or seek professional advice to ensure you are receiving every exemption, waiver, and credit you are eligible to claim.
Once the actual tax amount due is verified, you should pay it as soon as possible to avoid the failure to pay penalty that will keep applying, even during extensions. A failure to file extension will not stop a failure to pay penalty from applying each month. Most arrangements are also not available to those in certain bankruptcy proceedings. IRS Form 9465 (Installment Agreement Request) can be submitted online or through the mail.
Individuals with less than $50,000 may qualify for long term installment agreements for a setup fee ranging from $31 to $225, depending on payment methods. Long-term plans are those over 120 days in length. The IRS offers the best setup fee option for Direct Debit Installment Agreements which allow the IRS to collect directly from a bank account. Other payment options, especially over the telephone or in person, will cost more. Low-income taxpayers may qualify for exemptions from some fees and $0 setup fees, in some cases. Short term payment arrangements may also be available for individuals with less than $100,000 in debt.
Businesses may also be eligible for certain payment arrangements on tax debts. A long-term arrangement over 120 days is available on tax debt of $25,000 or less. Sole proprietors and some contractors would make arrangements as individuals. Owners of a Limited Liability Company (LLC) may be taxed in several different ways, depending on how the company elects to be taxed and local laws. You may want to seek the assistance of a tax attorney for arrangements of your business tax returns. Many businesses qualify for exciting changes recently made to the tax code. Pass-through businesses get new deductions and the corporate tax rate has been lowered. All of these changes have impacted tax returns in different ways, and some taxpayers may owe more in taxes.
What is the Failure to File Penalty?
The Failure to File Penalty may be applied to taxpayers who have not filed their taxes by an applicable due date. This penalty is assessed by the IRS on unpaid taxes after the filing deadline has passed. The failure to file penalty is 5% of the unpaid debt. This is increased by 5% each month to a maximum of 25%. This is a heavy penalty that can be avoided simply by filing a tax return.
The failure to pay penalty is 0.5% each month up to a max of 25%. In some cases, the IRS will increase the failure to pay penalty to 1% each month. The failure to file penalty is reduced by the failure to pay penalty, for a combined 5% each month and a combined max penalty of 47.5%. These penalties apply for each month or partial month, and interest is compounded daily.
The failure to file penalty and other penalties can account for a large portion of tax debt. The IRS understands that every tax situation is unique and there are options, such as the IRS Fresh Start Program, designed to help more taxpayers manage tax liabilities. Some taxpayers may request a waiver for reasonable causes, such as natural disasters or medical emergencies. There is also no penalty for failing to file when you owe no taxes or are due a refund for overpayment of income taxes. You can typically file and claim up to three years of past due taxes before they are lost.
No matter your tax and financial situation, there are options available. The IRS will consider payment arrangements and will possibly waive certain costs, especially for those suffering financial hardship. If you need tax relief assistance, contact the legal experts at Acadia Law Group today for a free consultation.