Failure To File Penalty

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21 Aug, 2024

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The Failure to File Penalty refers to a financial consequence imposed by tax authorities on individuals or businesses that fail to submit their tax returns within the specified deadline. Such imposition may be applicable according to the number of days or months for which the tax return remains overdue.

The Internal Revenue Service (IRS) often informs the respective taxpayers of their late filing penalty through a formal notice. The taxpayers can respond to this notice before the specified date by simply filing the return and paying off the due taxes with the penalty amount and applicable interest. In addition, the taxpayer may also request an extension or reduction through a response letter.

What Is the Failure to File Penalty?

The failure to file a penalty is a financial imposition on those taxpayers, whether individuals or businesses, who miss the due date of filing their tax returns with the IRS.
It is applicable to at least 5% of the total unpaid taxes monthly. In contrast, the maximum penalty for failure to file is 25%. Moreover, if such a penalty is due with the failure to pay the penalty in any month, it gets adjusted or reduced by that percentage.
A taxpayer can avoid such a penalty by requesting an extension before the due date of filing. Also, there are other ways to waive such charges, like first-time abatement pertaining to reasonable cause relief.

Failure To File Penalty Explained

The failure to file penalty is a fine imposed on those entities who could not file their tax returns in the proposed time. The IRS imposes the failure to file penalties on individuals and businesses to promote the timely submission of tax returns. Timely filing is crucial for accurately determining tax liabilities and upholding the tax system's integrity. These penalties act as a deterrent, motivating businesses to fulfill their tax responsibilities and contribute to the smooth operation of the tax collection process.

The IRS notifies taxpayers through letters or notices if a failure to pay a penalty is owed. There can be a failure to file a penalty when no tax is due or owed by the taxpayer. If the taxpayers foresee that they won't meet the original tax filing deadline, requesting an extension before the due date is better.

For individual U.S. taxpayers, the standard deadline is April 15. They can seek an extension by submitting IRS Form 4868. However, the authority accepts such an application only if the reason for the delay is valid. While applying for an extension is an option, it does not extend the payment deadline.

However, avoiding penalties by paying taxes in full or submitting a substantial payment is often advisable. Some penalties may be waived or reduced for those acting in good faith with reasonable cause. Moreover, the interest reduction is contingent on the decrease in penalty. However, suppose the taxpayer disagrees with a failure to file a penalty. In that case, they can contact the authority on the provided number or write a letter explaining the case, supported by relevant documents.

How To Calculate?

The failure to file penalty for taxes is generally computed as a percentage of the unpaid taxes accruing each month or part thereof that a return is overdue. Typically set at 5% of the unpaid monthly taxes, the penalty begins accumulating from the due date of the return, capped at 25%. However, a failure to pay penalty is applicable @0.5% up to 25%.

If both failure to pay and failure to file penalties are applicable, the failure to file is reduced by the applied failure to pay penalty for the respective month. Suppose the failure to file a penalty is 5%, and the failure to pay the penalty is 1%. If a taxpayer fails to file and pay the income tax by the due date, the failure to file penalty charged will be 4% (i.e., 5% - 1%). Simultaneously, failure to pay a penalty of 1% will also be imposed.

After the lapse of 5 months without payment, the failure to file penalty peaks, but the Failure to Pay penalty remains in effect until the tax is fully settled, reaching a maximum of 25% of the unpaid tax as of the original due date. In cases where the tax return is overdue by after 60 days, the minimum Failure to File penalty is determined by the specified amount or full amount of the underpayment, whichever is less.

However, individuals filing on time with an approved payment plan experience a reduced penalty of 0.25% per month. Failure to pay within ten days of a levy notice surges the penalty to 1% per month. In cases of unreported tax, a notice is sent with a specified due date. The penalty is 0.5% of unpaid monthly tax after the due date. Individuals with an approved payment plan receive a reduced penalty of 0.25%. Moreover, Interest on penalties accumulates until the balance is fully paid.

Examples

The regulations and penalty charges for the late filing of taxes may vary from state to state. Let us consider some examples to have an overview of such calculation and imposition:

Example #1

Suppose a taxpayer has an outstanding tax liability of $2,000 and fails to submit his tax return for a month after the deadline, which was on December 31, 2022. The IRS will impose the failure to file a penalty of 5% on the due taxes. Say the tax payment was due on January 31, 2023, and the taxpayer neither filed nor paid the tax till February 28, 2023. Also, as per the norms, the penalty for failure to pay is 1%. Determine the penalty charges.

Solution:

Failure to file penalty for January 2023 = 5% of $2000 = $100

Failure to file penalty for February 2023 = (5 – 1)% of $2000 = $80

Total failure to file penalty = $100 + $80 = $180

Failure to pay penalty = 1% of $2000 = $20

Total penalty = $180 + $20 = $200

Hence, the failure to file a penalty would amount to $180 after two months of the tax return being overdue, while the failure to pay the penalty charged would be $20.

Example #2

Suppose Zach, a taxpayer, has to file her returns by April 15, 2023, but she missed the deadline since she was hospitalized for a major surgery. However, her CA applied for an extension of the return filing date. Mrs. Zach got an extension till May 01, 2023. However, she could not file the income tax return even after the extended period. Hence, she was charged with a 5% failure to file a penalty after that.

Abatement

Administrative waivers provide release from certain penalties if some conditions are met. The most popular waiver, the First Time Abatement (FTA) waiver, applies to individuals and businesses. The IRS policy statements, news releases, or formal notices often notify the taxpayers of such ways to save them from penalties associated with,

Failure to File (IRC 6651(a)(1)),
Failure to Pay (IRC 6651(a)(2) and (a)(3)), and
Failure to Deposit (IRC 6656)

However, to qualify for first-time penalty abatement, specific criteria must be met:

Filing Compliance: Ensure all required returns are filed, or a valid extension is in place, with no pending return requests from the IRS.
Payment Compliance: Fulfill all tax obligations or have appropriate arrangements, possibly through an installment agreement, with current and timely payments.
Clean Penalty History: Maintain a penalty-free record, excluding potential estimated tax penalties, for the preceding three years.

Moreover, FTA doesn't apply to event-based filing requirements, the Daily Delinquency Penalty (DDP), or information reporting, which depends on another filing. Individuals can request FTA even if the tax is not fully paid; however, the Failure to Pay Penalty will continue to accrue until the tax is paid in full. Also, in situations where Reasonable Cause relief is requested but eligibility for First Time Abatement is evident from records, the latter will be applied, and the individual will be duly notified. If eligibility is unmet, the IRS will consider Reasonable Cause relief and communicate the decision.

Individuals should adhere to the instructions provided in the notice or letter received to appeal a penalty relief decision. Interest relief is not automatic; hence, interest is charged on penalties until the balance is paid in full. Any reduction or removal of penalties will result in corresponding adjustments to related interest.

Frequently Asked Questions (FAQs)

1. When does the failure to file penalty start?

Per the regulations and norms of the Internal Revenue Service, the failure to file penalty on the Federal income taxes in the United States begin to accrue right from the due date of filing the returns. Thus, any filing of returns after this date is charged with a specific penalty as applicable.

2. Does an extension avoid failure to file penalty?

An extension provides relief from the failure to file penalty, if the IRS accepts the extension application. However, if the taxpayer doesn't file the return even after the extended period, then the failure to pay penalty will be applicable. Also, if the taxpayer doesn't pay the total amount owed by the actual due date, it results in an additional failure to pay penalty.

3. What is the maximum failure to file penalty?

The maximum penalty the IRS charges is 25% of the total tax liability due to the taxpayer.