Understanding the IRS’s Failure to File Penalty
Introduction
The IRS imposes a penalty for failing to file tax returns on time, and it’s crucial to understand how this penalty works to avoid significant financial consequences.
What Is the Failure to File Penalty?
The IRS’s failure to file penalty applies when a taxpayer does not file their tax return by the due date. This penalty can affect various types of returns, including individual, payroll tax, partnership, and corporation returns. The penalty structure and amounts can differ depending on the type of return and the taxpayer’s situation.
Penalties for Different Types of Returns
- Individual, Payroll, and C-Corporation Returns: For any return with an unpaid tax balance, the failure to file penalty is calculated at 5% of the unpaid tax amount for every month or part of a month the return is late. This penalty caps at 25%. For example, if a taxpayer owes $10,000 and files their return one year late, the maximum penalty of 25% applies, resulting in a penalty of $2,500. If the taxpayer owning $10,000 on a return due April 15, 2024 and files their return on May 15th, 2024, a $1,000 or 10% penalty would apply because the return was late by two months or parts of a month (April and May).
- Partnership and S-Corporation Returns: For partnerships and S-Corporations, the penalty is $220 per partner or shareholder for every month or part of a month the return is late, for a maximum of 12 months. This penalty can accumulate quickly if a business has multiple owners. For example, a partnership with four partners that files their return over 12 months late would owe the maximum penalty of $10,560 ($220 x 4 partners x 12 months).
Filing Extensions and Penalties
Filing an extension does not necessarily exempt you from the failure to file penalty. If you file your return after the extended due date, the penalty is still calculated from the original due date. Therefore, it is essential to file and pay taxes on time, even if an extension has been filed.
Abating the Failure to File Penalty
If you are assessed a failure to file penalty, there are options for abatement, which means removing or reducing the penalty. One common method is to argue “reasonable cause,” which involves demonstrating that you did everything possible to file on time but were unable to due to circumstances beyond your control.
Common acceptable reasons for reasonable cause include:
- Death or illness of yourself or a close family member
- Natural disasters such as fires or floods
- Inability to obtain critical records needed for filing
- Technical issues with filing the return
To request penalty abatement, you need to file a form 843 (preferred method) or write a letter to the IRS explaining your situation and providing supporting documentation.
What Generally Does Not Qualify?
Certain scenarios do not usually qualify for reasonable cause, even if they are unfortunate. For instance, if a tax professional or CPA is negligent and files your return late, you generally cannot claim reasonable cause for that. Additionally, lack of knowledge and mistakes are not considered reasonable cause.
Conclusion
Understanding the IRS’s failure to file penalty and the potential for abatement is important for all taxpayers, especially for businesses who generally file many different types of returns. If you have incurred a failure to file penalty or need assistance with other IRS penalties, contact us today to explore your options.