5 things you should know about IRS penalties

Man reviews his tax forms at table, focused on how he can avoid incurring IRS penalties. Man reviews his tax forms at table, focused on how he can avoid incurring IRS penalties. Image:

In a Nutshell

If you file your tax return and pay your taxes on time — or if the IRS owes you a refund — you may never have to worry about IRS penalties. But if you file or pay late, or commit some other serious infraction, you could be on the hook for a big tax penalty.

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Owing taxes to the IRS is bad enough, but getting penalized on top of it could add up to serious financial trouble.

“The IRS uses penalties in an effort to try to change taxpayer behavior,” advises Mark Nichols, a CPA and principal at Landmark Financial Services Group LLC. “The seriousness of the penalty is designed to amp up the behavioral change.”

As a result, some penalties may cost you more money than others. In this guide, you’ll learn about the most common IRS penalties, when they apply and how to avoid them.


1. Common IRS penalties

If you file your tax return correctly and on time — and pay what you owe — by the due date, you’ll likely never have to worry about IRS penalties.

But there are some common scenarios in which you would probably face IRS penalties. Here are a few.

Failing to file a tax return on time

The deadline for filing your federal income tax return and paying any tax you owe is usually April 15 of each year (or the next business day if Tax Day falls on a weekend or holiday).

If you don’t file your return or get approved for an extension by that date, the IRS assesses a failure-to-file penalty, which starts at 5% of your unpaid tax. The IRS can charge this penalty each month or part of a month that the return is late, for up to five months.

If you eventually file but it’s more than 60 days after the due date (either April 15 or the Oct. 15 extension deadline), there’s a minimum late filing penalty. For returns that were due this year, that penalty is $210 or an amount equal to 100% of the tax you owe — whichever is less.

FAST FACTS

How can I request a filing extension?

Most people can get a six-month extension for filing their federal income taxes — no questions asked. But you must make your request by the tax-filing deadline — typically April 15 — in order to get the filing extension.

You can request an extension through IRS.gov/payments, by e-filing Form 4868 through a filing-service provider like Credit Karma Tax®, or by mailing the form. However you request an extension. Remember — an extension to file is not an extension to pay. Any tax you owe is still due on April 15.

Learn more about requesting a tax-filing extension.

Failure to pay on time

If you file a return on which you owe taxes and don’t pay by April 15, you’ll pay a penalty of 0.5% of the unpaid taxes per month — or part of a month — that they go unpaid, until you pay your taxes in full or until the total penalty amount reaches 25% of the taxes you owe. If you filed your return on time and you’re on a payment plan, this late-payment penalty is reduced to 0.25%.

Note that this penalty applies even if you get approved for an extension to file your tax return. So it’s important to crunch the numbers with the information you have to get an estimate of what you owe. Then, make sure you pay by the due date to avoid paying the penalty.

One caveat: If you get hit with both a failure-to-file penalty and a penalty for failure to pay for any month or period of months, the IRS cuts you some slack. For any month in which a failure-to-file penalty and a failure-to-pay penalty applied, you will not be charged for the failure-to-pay penalty amount.

Failure to pay proper estimated tax

If you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits, the IRS requires you to pay estimated tax payments throughout the year.

If you don’t, you may owe a penalty based on how late your payments are and the interest rate for the period.

For example, if you’re self-employed and you expect your tax liability to be more than $1,000 for the year, you’ll probably need to make estimated tax payments to avoid a penalty.

Making a bad payment

If you pay your tax with a check that bounces, or other form of payment that gets rejected, the IRS can charge you a penalty. If your payment was for less than $1,250, your penalty will be the amount of the payment or $25, whichever is less. For payments of $1,250 or more, the penalty is 2% of the amount of the payment.

What to do if you can’t pay your taxes on time

2. You probably won’t get penalized if you’re getting a refund

If you’re expecting to get a tax refund, the failure-to-pay penalties are automatically off the table.

“Most people get a refund,” says Nichols, “so that’s not the behavior they’re concerned about. They’re more concerned about the people who owe a lot of money and don’t file.”

That said, don’t take this as encouragement for a late filing. It’s still best to file your tax return as quickly as possible, because the sooner you file, the sooner you can get your tax refund.

3. You may also owe interest

If you can’t pay your tax debt, the IRS offers installment agreements that allow you to pay your bill over time. But be aware that if you get on a payment plan, your monthly payment will include interest in addition to a reduced failure-to-pay penalty.

The interest rate changes every three months. For the fourth quarter of 2018, for instance, the interest rate is 5% for underpayments.

4. If you wait too long, you could face other consequences

If you decide to give up on filing your tax return, a failure-to-file penalty is likely the least of your concerns.

“The IRS has the authority to file a tax return on your behalf and assess tax,” says Nichols, “which means it’s now a legal liability that the government has determined is fair and appropriate and needs to be collected.”

This specialized return is called a “Substitute for Return.” It happens only if you ignore a notice from the IRS stating that you haven’t filed a return and that you do, in fact, need to file one.

If the IRS has determined that you’re evading taxes or committing tax fraud, you could be on the hook for fines — and even jail time.

5. You can request a penalty waiver

Depending on your situation and whether you’ve paid IRS penalties in the past, you may be able to request a waiver or reduction in your penalty. Here are a few ways you can get relief.

First-time penalty abatement

If you’ve never had to file a tax return before, or you haven’t received a penalty in the past three tax years, you can request that the IRS waive the penalty.

To qualify, you must have filed your current return on time or have filed for an extension and paid or arranged to pay what you owe. It’s generally better to wait to request an abatement until you’ve paid the full amount, though, since the failure-to-pay penalty will continue to accrue while you have an open balance.

Reasonable cause

If you have a legitimate reason for not being able to file or pay taxes on time, you can request relief. Some causes the IRS considers reasonable include …

  • Fire, casualty, natural disasters or similar hazards
  • Inability to obtain relevant tax records
  • Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of their immediate family

The IRS will also consider any other reason that shows you tried in good faith to meet your federal tax obligations but couldn’t. Note that not having the money to pay your tax bill isn’t a legitimate reason for not filing and paying on time. It may, however, help reduce your failure-to-pay penalty.

Also, keep in mind that you’ll probably need to provide evidence for your inability to file or pay on time, such as hospital or court records, proof of a casualty loss or other relevant documentation.

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Administrative relief or statutory exceptions

If you’re facing penalties because you acted on incorrect advice from the IRS, you can apply for penalty relief. If the advice was written, you may need to provide your initial written request for the advice, the response with the incorrect advice, and the report of penalties related to the erroneous information.


Bottom line

Avoiding IRS penalties can be easier if you are owed a refund, simply because you won’t have to worry about late payment penalties. But even if you owe taxes, you don’t have to worry about penalties as long as you avoid a late filing and pay your tax bill on time.

If you need more time to file your return, though, make sure to apply for a six-month extension, and most importantly, pay your estimated amount owed by the April 15 due date. And if you qualify for one of the IRS penalty relief options, know what’s required to qualify.