Understanding the IRS’s Failure to Pay Penalty
The IRS imposes a penalty for failing to timely pay tax owed. It’s crucial for business owners to understand how this penalty works to avoid costly financial consequences.
What is the Failure to Pay Penalty?
The failure to pay penalty is assessed when a taxpayer does not pay their taxes in full, even if they have filed their tax return on time. This penalty is imposed at a rate of 0.5% per month on the unpaid tax balance. Over time, this penalty can add up, especially if combined with other penalties such as the failure to file penalty.
Sometimes, both the failure to file and the failure to pay penalties will apply concurrently, such as when a taxpayer owes tax and files their tax return late. In this instance, the penalties combine for a maximum of 5% per month, though the failure to pay penalty continues to accumulate at a slower rate after the failure to file penalty maxes out. The failure to pay penalty maxes out at 25% of the unpaid taxes. However, since the penalty is assessed at a much lower rate of 0.5% per month, it can continue accumulating long after the failure to file penalty has reached its maximum.
In certain cases, entering into an installment agreement with the IRS—where the taxpayer pays off their debt over time—can reduce the failure to pay penalty. However, the failure to pay penalty can also be increased, including when a taxpayer receives a notice of intent to levy and does not pay the balance due.
How to Get the Failure to Pay Penalty Abated
Fortunately, there are two main ways for getting the failure to pay penalty reduced or completely eliminated:
- First Time Abatement: If you have filed and paid your taxes on time for the past few years (generally, the past three years), the IRS may waive both the failure to file and failure to pay penalties under First Time Abatement.
- Reasonable Cause: If First Time Abatement doesn’t apply, taxpayers can request abatement under 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, and technical issues with filing the return.
Key Takeaways
The failure to pay penalty is a costly consequence of not paying taxes on time. It accumulates at a slow but steady rate of 0.5% per month and can reach a maximum of 25% of the total unpaid taxes.
To avoid or mitigate this penalty, the best course of action is to pay taxes on time. However, if penalties do arise, taxpayers may qualify for relief through first-time abatement or reasonable cause. To explore these options, contact us today!