It happens to the best of us - April 15 (or 17th as it was this year) comes and goes without filing a tax return or extension. Even for those that file an extension, October 15 often comes and goes without filing a tax return. Don’t panic or fear that the IRS will come knocking on your door tomorrow, (remember the IRS does NOT usually call so anyone that calls you claiming to be the IRS is a scam) but they’ll more politely send a letter that will cause you a small heart attack. As soon as you are able to and even before you receive a notice from the IRS, file the return especially if you anticipate owing taxes on your federal or state return as interest and penalties start accruing after due dates.
A few penalties you should be aware of at the federal level:
- Underpayment Penalty – The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
- Failure-to-Pay Penalty – If you do not pay the amount due on your tax return by the due date (April 15 for individuals), you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If you filed an extension and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
- Failure-to-File Penalty – The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
- If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
- First-Time Abatement Relief – Good news, if you have been assessed the failure-to-pay or failure-to-file penalties described above, you may qualify for the First Time Abatement Relief program. The purpose of the program is to provide relief to taxpayers that are normally compliant with filing and paying their taxes on time. To qualify for the program, the taxpayer must have properly filed and paid their taxes for the prior three years. For example, in 2016 a taxpayer failed to file his or her tax return. When the return was filed in 2018, the IRS assessed additional penalties and interest on taxes owed due to failure to file and failure to pay the taxes on time. The taxpayer may qualify for First-Time Abatement Relief if he or she properly filed and paid their 2013, 2014, and 2015 taxes. The interest cannot be abated.
- Failure to File Penalty for Partnerships & S-Corporations – If you are an owner in a partnership or S-corporation filing forms 1065 or 1120-S, be sure to file your returns on time (March 15) or extend and file by the extension deadline (September 15). The failure to file penalty is a hefty one for businesses and assessed at $195 per owner ($200 for 2017) for each month the return is late, up to 12 months. If you are a 2-person partnership and file over a year late, penalties can be assessed at $4,680 or more. A potential abatement for small partnerships is available if 1) the partnership consists of 10 or fewer partners, 2) the partners are all US resident individuals or the estate of a deceased partner, and 3) each partner files their individual tax return on time. Like individuals, an S-corporation or partnership can abate the penalty under the first-time penalty abatement or a clean compliance history. One last way is under the reasonable cause abatement where circumstances like death, fire, undue hardship, etc made it so you couldn’t comply.
If you have any questions about the above penalties or what penalties/fees apply at your state level, the First-Time Abatement Relief program, or need help filing prior years returns, please consult a tax professional.