The IRS can charge you with many different types of tax penalties for failing to meet your responsibilities as a taxpayer. The IRS will automatically assess some penalties when you miss a deadline or don’t pay your tax bill on time. Other penalties are only assessed when the IRS believes you intentionally violated the tax laws by committing tax fraud or tax evasion.
You can avoid or minimize most IRS tax penalties by filing an accurate tax return and paying your taxes on time. If the IRS charges you a tax penalty, you may be able to use penalty abatement to reduce the amount you owe.
The late filing penalty is 5% of the tax owed per month. The maximum penalty is 25% of the tax owed, and returns that are at least 60 days late face a minimum penalty of $210 or 100% of the tax owed, whichever is less. You can read our article on the penalties for late tax returns to learn more.
To avoid the late filing penalty, you should file on time even if you can’t pay your full tax bill. You may be able to enter into an installment agreement to pay off your balance with monthly payments. You can also request an automatic six-month filing extension to avoid this penalty.
If you never file your return, you could face additional consequences beyond the failure to file penalty. The IRS can file a substitute return (SFR) on your behalf and then attempt to collect the taxes owed from you using bank levies or wage garnishments. When the IRS files an SFR, they will generally assess the tax at a higher amount than you would have owed if you filed on your own since it will not include deductions or tax credits.
The late payment penalty is 0.5% of the tax owed per month. If you are subject to both the late payment and late filing penalties, the combined penalty is 5% per month because the IRS reduces the late filing penalty to 4.5%.
You can significantly reduce your total tax penalties by filing your tax return on time when you have a balance due. The IRS will still charge you the 0.5% late payment penalty each month, but you’ll avoid the much significant failure to file penalty.
The maximum failure to pay penalty is 25% of the balance due, but this amount is reduced to 22.5% if you are also assessed the maximum late filing penalty. The late payment penalty is also reduced to 0.25% once you have entered into an IRS installment agreement.
On top of these penalties, you’ll also be charged interest each month on your outstanding tax liability.
The IRS underpayment interest rates are set each quarter. The interest rates for individual taxpayers are set by taking the federal short-term rate and adding three percentage points.
You will be charged interest as soon as your payment is one day late or if you fail to pay enough in taxes. While you can sometimes abate penalties due to reasonable cause, interest abatement is only granted in rare cases when the has IRS made an error.
Taxpayers whose income is not subject to withholding—including self-employed individuals and independent contractors—may need to make estimated tax payments throughout the year. The taxpayer typically makes these payments in equal quarterly installments, but taxpayers with uneven income during the year may need to make unequal payments.
If you fail to make estimated tax payments or don’t pay enough, the IRS may charge you underpayment penalties and interest. The penalties are calculated based on the amount of the underpayment and the length of the underpayment.
Taxpayers with W-2 income could also be charged the underpayment penalty if they don’t have enough taxes withheld. You can figure your penalty amount using Form 2210, but the IRS will figure it for you and send you a bill in some cases.
There are several safe harbors you can use to avoid underpayment penalties:
When the IRS examines your tax return, there’s a good chance you’ll end up owing additional taxes. This examination can also cause you to owe various penalties and interest.
In many cases, the IRS charges these penalties due to inaccuracies on your return. It’s also possible to face tax fraud penalties if the IRS believes you intentionally violated the tax laws.
The accuracy-related penalty usually is 20% of the understated tax. The IRS could charge you the accuracy-related penalty for any of the following reasons:
If you pay the IRS with a check or other form of payment that the bank dishonors, theIRS will charge a penalty of 2% of the amount of the check. For payments less than $1,250, the dishonored check penalty is the lower of $25 or the amount of the check.
Tax fraud is an intentional violation of the tax laws to avoid paying taxes. The IRS has the burden to prove that the taxpayer committed tax fraud.
The general civil tax fraud is 75% of the understated tax. The taxpayer will also owe the back taxes, interest, and possibly other tax penalties.
The fraudulent failure to file penalty is another severe tax fraud penalty. This penalty equals 15% of the tax due per month, with a maximum of 75% of the tax due. This penalty is used instead of the general failure to file penalty when a taxpayer has a history of non-filing or otherwise shows that they intentionally failed to file their tax returns.
Tax evasion is a willful attempt to evade or defeat any tax. It can result in up to 5 years in prison and a $100,000 fine ($500,000 for a corporation).
Other criminal tax penalties include the following:
A taxpayer can also face both civil and criminal penalties for the same actions.
You may be able to request relief from certain IRS penalties. The IRS may grant penalty abatement due to reasonable cause, statutory exception, or using the first-time abatement (FTA) waiver.
You can use FTA for a single tax period. The taxpayer must have no penalties in the past three years and be in full tax compliance.
You can use reasonable cause abatement in a variety of situations. Typically, these cases involve natural disasters, illness, or some other event that was out of the taxpayer’s control and caused them to miss a payment or filing deadline.
Penalty relief can also be based on statutory exceptions found in the Internal Revenue Code. One common statutory exception is penalty relief given when the IRS gives erroneous advice to a taxpayer that causes a tax penalty.
Contact a tax professional if you need help determining your eligibility for penalty relief or requesting penalty abatement.