What are the Penalties for Late Tax Returns?
When it comes to penalties for late tax returns, the IRS has a candy store display of penalties and fines to choose from. How many of these penalties the IRS will choose for your late individual income tax return will mostly depend on three basic things: how late your return is filed, the unpaid tax balance as of the original due date of the return, and whether you made any required estimated tax payments. With just a little planning, and perhaps an explanation or two, you may be able to avoid or reduce many of the penalties for late tax returns.
The Two Most Common Penalties for Late Tax Returns
The penalties you are most likely to be charged if you file your tax return late are the penalty for filing late and the penalty for late payment of tax.
Penalty for Filing Late (This penalty is officially referred to as the Failure to File Penalty) Individual income tax returns are due on April 15th. The return must be postmarked or electronically transmitted by this date. If you are unable to file the return by April 15th, then a valid request for an extension (Form 4868) must be filed (or e-filed). The extension will grant you until October 15th to file your tax return.
If you file after April 15th without an extension, or if you have an extension and file after October 15th, then you will be charged with a failure to file penalty for filing a late tax return if there is a balance due on the tax return when you file. The penalty is 5% of the balance due per month or partial month that the return is filed late. For example, if you did not have an extension and you filed your tax return on June 5th with a balance due of $1000.00, then the failure to file penalty would be 5% x 1000 x 3 months or $150.00. (April is a partial month, May is a full month, and June is a partial month, which totals 3 months/partial months for calculating the penalty.)
The maximum failure to file penalty is 25% of the tax owed, less any penalty for failure to pay (see next section) that was charged in the same month. Therefore, in any month that the failure to pay penalty was assessed, the failure to file penalty drops to 4.5%, so that the combination of the two penalties is not more than 5% of the tax owed for that month.
If the return is filed more than 60 days after the tax due date, including extensions, then the minimum failure to file penalty is $100.00 or the amount of the tax due, whichever is less.
Penalty for Late Payment (This penalty is officially referred to as the Failure to Pay Tax Penalty) This penalty is one that frequently causes confusion. Regardless of whether an extension is filed, the balance due on the tax return is payable by April 15th. Even if the return is filed before the extension date, the failure to pay penalty will apply to any balance due that was not paid by April 15th.
The failure to file penalty is initially 5% of the balance due per month or partial month that the balance due is late. (See Penalty for Filing Late for an explanation of how the months are counted).
The failure to file penalty increases to 1% after the IRS issues a notice and demand for immediate payment or 10 days after the IRS issues a notice of intent to levy.
This penalty is only .25% per month once an installment agreement is in effect if the return was filed by the due date and the payments are current.
The maximum failure to pay penalty is 25% of the tax owed. The penalty continues to calculate on the balance due each month until the balance is paid in full, or until the maximum 25% is reached.
The failure to pay penalty may not be charged if 90% of the tax due was paid before April 15th.
As noted above, in any specific month, the maximum combined penalty for failure to file and failure to pay penalty is 5%.
A Penalty May Apply for Unpaid Estimated Taxes
If you failed to make required quarterly estimated payments, or if you paid the estimated payments late, a penalty for underpayment of estimated taxes will be charged. This penalty can be charged even if you file the return on time, so it is technically not a penalty for late filing of a tax return. However, the penalty for underpayment of estimated tax is commonly charged with the penalties for late tax returns. The penalty is calculated at the applicable rate of interest, (see interest section below), so the penalty also has more of the nature of an interest charge. The calculation of this penalty can be a little cumbersome and you may prefer to have this penalty reviewed by a tax professional. Some tax preparation programs will also help you to determine if you have been correctly charged with this penalty.
Interest is Added to any Penalties for Late Tax Returns
Interest will be charged on any balances due at the prescribed Federal rate. Currently the interest rate for underpayment of taxes is 4%. The rate is reviewed and updated quarterly. A summary chart of Federal interest rates is available on the IRS website. The IRS recently announced that the rate will remain at 4% for the 4th quarter of 2010. (Reference IRS announcement)
Requesting Abatement (Waiving) of Penalties
You may be able to have a penalty for a late tax return waived. For any late tax return penalty, if you can show reasonable cause, the IRS may waive some or all of the penalty. The IRS has a recognized list of reasons considered to be administratively acceptable for waiving penalties, although they are not considered uncompromisable rules. Reasonable cause might be a death or illness, a natural disaster, storm, fire, or accident. Hospitalization and overseas travel can also be exceptions for the penalty. A family crisis may be considered a valid reason, as well as a series of events that cause personal overwhelm. Each request is reviewed individually.
Reasons that the IRS does not usually consider valid are simply forgetting the deadline, ignorance of the law, and relying on someone else to file the tax return.
If the late filing and/or late payment was for a valid reason and not due to willful neglect, then you should submit a written statement to the IRS center where the return was filed, or to the address on the notice, if the notice gives you an address for sending correspondence. Explain simply the reason for the late filing and/or late payment and request that the IRS waive (abate) the penalty.
If the penalty assessed is small to moderate, then you may prefer to write the letter yourself. If the penalty is large and/or you do not understand why it was assessed, then you are well advised to consult a CPA, tax attorney, or other tax professional for reviewing the penalty and possibly requesting abatement of any penalties for late tax returns.
The IRS has provided Form 843, Claim for Refund and Request for Abatement that you may use for this purpose.
Note that even if a penalty is waived, the IRS will usually not waive the applicable interest.
Other Possible Penalties for Late Tax Returns
There are many other, much less common, penalties that the IRS may assess on your late tax return. In fact, there are even criminal penalties that can be imposed. If you are charged with any of these penalties, please consider having your CPA, tax attorney, or tax professional review the penalty and possibly respond to the IRS on your behalf.
A partial list and brief explanation of other possible penalties for late tax returns:
Fradulent failure to file return, Code Sec 6651(f) – 15% per month/part month that the return is late, up to 75% of the balance owed.
Accuracy related penalties, including negligence and substantial understatement of tax, Code Sec 6662 – 20% of the accuracy related portion of the underpayment
Frivolous returns, code Sec 6702 – $5000.00 per frivolous return
Willful attempt to evade or defeat tax, Code Sec 7201 – Felony punishable by a fine up to $100,000 (individuals), imprisonment of up to five years, or both, plus prosecution costs
Willful failure to pay tax or file a tax return, Code Sec 7203 – Criminal misdemeanor punishable by a fine of up to $25,000 (individual), imprisonment up to one year, or both, plus prosecution costs
Fraud, Code Sec 7206 – Felony punishable by a fine of up to $100,000 (individual) up to three years in prison, or both
Note that while this list sounds a little intimidating, the tax balances are usually large and the neglect fairly blatant before the IRS begins to consider criminal penalties or large fines. Consult with a tax attorney immediately if criminal charges are a consideration for your tax return.
This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.
CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties