If you owe the IRS you may have noticed that the balance due is higher than what you saw on the return. You aren't alone. The culprit in many situations is the failure to file penalty. It is often the biggest penalty assessed when an individual owes the IRS.
What is the failure to file penalty?
The failure to file penalty is a penalty assessed by the IRS when you don’t file your tax return by the due date. If you filed an extension of time to file that only covers you for 6 months. If your tax return is not acknowledged by the IRS by the due date the failure to file penalty calculation begins.
Let's say Mark has a balance due on his tax return. The tax deadline is April 15th and he did not file an extension. His failure to file penalty began calculating on April 16th.
If you do not have your tax documents ready to file by the deadline you can file a tax extension. This extension gives you an additional 6 months to file. It does not give you extra time to pay your balance due.
How is the penalty for late filing calculated for individuals?
The IRS calculates the failure to file penalty based on two things.
How late you filed your return, and
The taxes due on the payment due date
The failure to file can be up to 25% of the unpaid taxes that you owe. The IRS assesses 5% each month until the penalty reaches 25%. Interest also accrues on the assessed penalty.
It is important to note for tax years 2020, 2021, and 2022 the failure to file penalty is a minimum of $435 if your return is over 60 days late. $435 or 100% of the tax shown on your 1040, whichever is less.
Let's say take a look at Mark's situation again. Mark has a balance due of $1,000 on his tax return. He does not have the money to pay in April so he puts his head in the sand and does nothing. He puts his head back up in August and decides to file in September. Because it is more than 60 days past April 15th the minimum penalty Mark will pay is $435.
If the IRS is also assessing the failure to pay penalty at the same time it will reduce the failure to file penalty. The combined penalty is will be 5% for each month your return is late. Once the failure to file penalty maxes out the failure to pay penalty keeps growing.
The IRS charges interest on both penalties.
How to get IRS penalties waived
If you are facing failure to file penalties for your 2019 or 2020 income tax return the stars have aligned. The IRS announced on August 24th, 2022 that they will be automatically waiving those penalties. All you have to do is make sure you file your 2019 and 2020 tax returns before September 30th, 2022.
If that's not you there are still ways you may qualify to have your penalty forgiven. There is first-time penalty abatement and reasonable cause.
Reasonable cause has more criteria that you must meet. Essentially if the IRS can see that you did act in good faith and had a hardship you can prove, they may waive the penalty. I will also be discussing these 9 reasonable causes on my podcast. Episode 12 discussing IRS penalties launches on September 9th. Follow the podcast on your favorite podcast platform.
Avoid the failure to file penalty
You can avoid the failure to file penalty by filing your return by the due date. If you can't file by the due date don't do like Mark and put your head in the sand. File a request for an extension to file your tax return.
If you are not filing due to the fact that you owe, I have great news for you. If you have been a compliant taxpayer in the past you may qualify for a guaranteed payment plan with the IRS. If not a guaranteed plan you can still negotiate with the IRS. Download your free copy of the Back Tax Negotiation Checklist that I created and check out episode 10 of Tax Relief with Timalyn Bowens, IRS Installment Agreements.
Timalyn S. Bowens EA is America's Favorite EA and Tax Expert that has a personal mission to fill the tax literacy gap by educating taxpayers on how the tax law affects them. Timalyn is also the owner of Bowens Tax Solutions. They will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
If you are facing questions regarding your personal or business taxes, working with the right professional makes all the difference. Timalyn is here to assist you with tax representation, tax planning, and more. Visit www.bowenstaxsolutions.com for more information.