IRS penalties are designed “to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.” (IRM 18.104.22.168). In other words, IRS penalties make noncompliance more costly and painful than paying voluntarily and on-time. IRS tax penalties include the failure-to-file penalty and the failure-to-pay penalty.
The failure-to-file penalty is generally more than the failure-to-pay penalty. Therefore, even if you cannot pay all the taxes owed, timely file your tax return. Also, pay as much as possible. Next, consider an installment agreement or offer-in-compromise.
The penalty for filing late is usually 5% of the unpaid taxes for each month or partial month that your federal income tax return is late. This penalty will not exceed 25% of unpaid taxes.
If you file your tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
A failure-to-pay penalty of 0.5 percent of unpaid taxes results for each month or partial month after the due date. This penalty can be as much as 25 percent of your unpaid taxes.
If you request an extension of time to file by the tax deadline and paid at least 90 percent of your actual tax liability by the original due date, no failure-to-pay penalty results when the taxpayers pays the remaining balance by the extended due date.
If both penalties apply in any month, reduce the 5 percent failure-to-file penalty by the failure-to-pay penalty. However, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax for tax returns filed more than 60 days after the due date or extended due date .
Avoiding IRS Penalties
No penalty is due if you failed to timely file or pay because of reasonable cause rather than willful neglect. “Reasonable cause” depends on the circumstances and IRS discretion. For more information regarding avoiding IRS penalties, please email me the details of your tax matter.