The Penalty for Not Filing Taxes

The IRS assigns tax penalties and interest when you’ve either filed late or incorrectly. Penalties are generally payable upon notice when assessed, and are paid in the same manner as taxes. Associated IRS correspondence will illustrate the break down of penalties and how they were assessed (or information on how to obtain the computation if not included).

Estimated Tax Penalties

Estimated tax payments are used to pay income tax and self-employment tax. Other taxes and amounts reported on your tax return also include income from interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount being withheld from your salary, pension, or other income is insufficient to pay your tax liability.

If you do not pay enough through withholding or estimated tax payments, you may have to pay a penalty. Sometimes, even if you are due a refund at the end of the tax season you can still be assessed a penalty for underpaying each estimated tax period.

(See Civil Trust Fund Penalties for more on business estimated tax penalties.)

Late Filing & Payment Penalties

These are the two most common types of penalties:

Filing Late

If you do not file your return by the due date (including extensions), you may have to pay a “failure-to-file” penalty. The penalties for late tax returns are usually 5%, and no more than 25%, for each month or part of a month that a return is late. The penalty is based on the unpaid tax by the due date (without regard to extensions).

If you file your return more than 60 days after the due date, the minimum penalty is $100 or if your tax is less than $100, 100% of the tax on your return.

Paying Late

You will have to pay a failure-to-pay penalty of 0.5% of your unpaid taxes for each month, or part of a month, after the tax’s due date. This federal tax penalty does not apply during the automatic six-month extended filing period if you:

Paid at least 90% of your actual tax liability,
Paid this 90% on or before the original due date of your return,
And pay the balance of your tax when you finally file your return.

The “failure-to-pay” penalty rate increases to a full 1% per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after Notice of Intent to Levy is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1% (0.25%) per month during any month in which the taxpayer has a valid installment agreement in force.

IRS Blended Penalty Rate

For any month both the penalty for filing late and the penalty for paying late apply, the penalty for late filing is reduced by the penalty for late paying for that month, unless the minimum penalty for filing late is charged.

Accuracy Related Penalties

The two most common accuracy related penalties are the “substantial understatement” penalty and the “negligence or disregard of the rules or regulations” penalty. These penalties are calculated at a flat 20% of the net understatement of tax.

Penalty for Substantial Understatement

You understate your tax if the tax shown on your return is less than the correct tax. For individuals, the understatement is substantial the understatement is larger than 10 % or $5,000, whichever is greater. For corporations, the understatement is considered substantial if the tax shown on your is more than the lesser of 10% (or if greater, $10,000) or $10,000,000.

You may avoid the substantial understatement penalty if you have significant reason for the understatement or through adequate proof. To avoid the substantial understatement penalty by providing adequate proof, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position.

To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged. This means that the position must be more than just arguable. There must be some authority supporting the position.

Penalty for Negligence and Disregard of the Rules and Regulations

“Negligence” includes (but is not limited to) any failure to:

make a reasonable attempt to comply with the internal revenue laws
exercise ordinary and reasonable care in preparation of a tax return or
keep adequate books and records or to substantiate items properly

This penalty may be asserted if you carelessly, recklessly, or intentionally disregard IRS rules and regulations. This is defined as taking a position on your return with little or no effort to determine whether the position is correct, or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.

Civil Fraud Penalty

If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax. The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.

Negligence or ignorance of the law does not constitute fraud.

Typically, IRS examiners who find strong evidence of fraud will refer the case to the Internal Revenue Service Criminal Investigation Division for possible criminal prosecution. Keep in mind that both civil sanctions and criminal prosecution may be imposed.

Frivolous Tax Return Penalty

You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. If you jointly file a frivolous tax return with your spouse, both you and your spouse each may have to pay a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.

You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.

This penalty is added to any other penalty provided by law.

Penalty for Bounced Checks

If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2% of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.