Updated: Oct 20
The failure to pay penalty is a penalty assessed by the IRS to taxpayers for not paying their tax bill by the filing deadline. The penalty is a percentage of the taxes you didn't pay. This along with others can make your tax bill skyrocket if they are not dealt with immediately. It is better to avoid them altogether.
How is the failure to pay penalty calculated?
You tax bill and tax return are due on the filing deadline. If you file your tax return on April 15th and pay on May 15th the IRS considers your tax payment late. For individuals the penalty is a .5% of the taxes you owe for each month it is late. The penalty will not exceed 25%. Interest also accrues on the penalty and taxes owed.
The IRS bases the penalty on your failure to pay the amount shown on the return and failure to pay the tax you didn't put on the return.
This means if you left $1,000 in income off of your return the IRS will also assess the penalty for that amount. If the IRS discovers you did not report your total income they will send you a notice demanding payment. You are usually given 21 days from the date of the notice. If the balance is $100,000 or more you only have 10 days. If you do not pay the bill within 10 days the penalty rate increases to 1% each month.
Lets say that you owed $12,000 after filing your return. Your return was due April 15th, and you reported all income on time. However you weren't able to pay until January 15th of the following year. Your failure to pay penalty would be $540. That is .5% for each of the 9 months you did not pay your bill. Interest as would also accrue on the penalty.
If the failure to pay penalty and failure to file penalty apply to the same month the IRS reduces the failure to file penalty by the failure to pay penalty. This means the failure to file penalty in month one will only be 4.5%.
If the IRS issues an intent to levy and you do not make payment within 10 days the penalty changes. It increases to 1% each month.
Can you reduce the failure to pay penalty?
You can reduce the failure to pay penalty. Setting up an installment agreement reduces the amount of your penalty each month. An installment agreement is a payment plan where you agree to pay the IRS within a certain amount of time. The IRS cuts the penalty in half to .25% when you are on an approved payment plan.
Can I remove the failure to pay penalty?
You may be able to remove the failure to pay penalty. If not moved completly, you may be able to have it reduced. If you are able to show the IRS that you acted in good fath but have a reasonable cause for not paying they may remove them. You can find out more about reasonable cause penalty abatement on Episode 12 of Tax Relief with Timalyn Bowens.
You are also given the opportunity to dispute a penalty that you do not agree with. The best way to avoid this penalty is to pay your taxes on time. You can do this by making quarterly estimated tax payments. If you are an employee you can adjust your withholding.
If you are already facing this penalty, abatement hasn't worked, and you have no way to pay there is still hope. You may qualify for currently not collectible status. This protects you from any IRS enforcement. If not, you may still qualify for an installment agreement so that you can pay over time.
Follow Tax Relief with Timalyn Bowens on your favorite podcast platform for tips on how to deal with the IRS. Because back taxes shouldn't ruin your life.
Timalyn S. Bowens EA is America's Favorite EA and Tax Expert who will work hard to find a customized legal solution 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. As the host of Tax Relief with Timalyn Bowens and a YouTube content creator she empowers taxpayers to make educated decisions about their tax situation.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information..