Penalty for Not Filing Taxes: The Failure to File Penalty
The failure to file penalty is one of the most common IRS tax penalties. It is also harsher than many other penalties because the IRS wants to encourage tax filing compliance, even when a taxpayer can’t afford to pay their tax bill.
The basic failure to file penalty is 5% per month. You can avoid this penalty by filing your tax returns on time or requesting an automatic six-month filing extension if you are going to miss the tax filing deadline.
When the IRS Charges the Failure to File Penalty
The IRS will charge the failure to file penalty as soon as your tax return is one day late. However, the IRS only charges this penalty when you have a balance due on your tax return. The IRS will not charge the failure to file penalty if you are due a tax refund.
If you file your return on time but don’t pay your full tax liability, the IRS will only charge you the failure to pay penalty. This penalty is much smaller at only 0.5% of your unpaid tax liability.
If you request a six-month filing extension, the IRS won’t charge the failure to file penalty as long as you file by October 15th. However, the IRS may still charge you the failure to pay penalty if you haven’t paid at least 90% of your total tax liability for the year.
How the Standard Failure to File Penalty is Calculated
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The IRS charges a 5% penalty every month. If your return is even one day late, you’ll be charged the full 5% penalty for that month.
The penalty is reduced to 4.5% if you are also being charged the failure to pay penalty in a given month. The combined amount of both penalties is 5% per month.
The maximum overall failure to file penalty is 25% of your unpaid tax. After your return is five months late, you will reach this maximum penalty threshold.
There is also a minimum penalty amount for returns that are at least 60 days late. This amount is the lesser of $210 or the full amount of the tax due on your return.
The maximum combined penalty for the failure to file and the failure to pay is 47.5% of the tax owed. You’ll also be charged interest each month your tax bill is overdue.
The Fraudulent Failure to File Penalty
If your failure to file was due to fraud or negligence, the penalty increases to 15% per month, with a maximum penalty amount of 75% of the unpaid tax.
This penalty is much less common than the standard failure to file penalty. The IRS must have clear and convincing evidence that you failed to file with an intent to commit tax fraud.
The IRS may assess the fraudulent failure to file penalty if you repeatedly fail to file tax returns or refuse to cooperate with the IRS.
Failure to File Penalty for Tax-Exempt Organizations
Tax-exempt organizations such as charities and non-profits can face a penalty of $20 per day when they fail to file a required tax return on time. This penalty can also be assessed if the return is incomplete or contains incorrect information.
The maximum penalty is generally $10,000 or 5% of the organization’s annual gross receipts, whichever is less. However, organizations with annual gross receipts over $1 million can be charged $100 per day, up to a maximum amount of $50,000.
An organization that fails to file an annual return for three straight years automatically loses its tax-exempt status.
Failure to File Penalty for Partnerships and S-Corporations
The failure to file penalty is $210 per month for partnerships and $200 per month for S-Corps, and the penalty is charged to each partner or owner separately. The IRS can also assess a $270 penalty for the failure to furnish a Schedule K-1 to a partner.
Unlike other failure to file penalties, the partnership and S-Corp penalties can be assessed by the IRS even if there is no tax due on the return.
Penalty Relief for the Failure to File Penalty
You can request penalty abatement of the failure to file penalty in some cases. The IRS may agree to remove your penalties if you qualify for any type of penalty relief.
You can use the First-time penalty abatement option when you have no tax penalties for the prior three tax years. You’ll need to file all delinquent tax returns and arrange to pay your taxes before your request first-time penalty abatement.
You can also request penalty abatement for reasonable cause. Some example of reasonable causes the IRS may consider include:
- Natural disasters
- Loss of tax records
- Death of an immediate family member
- Serious illness
You’ll need to provide proof of your reasonable cause and how it directly impacted your ability to meet your tax obligations.
Contact a tax professional if you need assistance requesting penalty relief for reasonable cause or first-time penalty abatement.
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