There are two types of penalties the IRS assesses when it comes to annual tax returns.
- Failure to file applies when you don’t file your tax return by the due date.
- Failure to pay applies when you don’t pay the tax you owe by the due date.
Annual Tax filing related penalties
The Failure to File Penalty applies if you don’t file your tax return or extension request by the due date. Monthly interest of 5% on your unpaid taxes for the year, up to a total of 25% the value of your unpaid taxes.
Example: If you owe $2,000 in taxes and file your return 3 months late:
- Month 1: $2,000 × 5% = $100
- Month 2: $2,000 × 5% = $100
- Month 3: $2,000 × 5% = $100
- Total failure to file penalty: $300
The Failure to Pay Penalty applies if you don't pay the taxes you owe by the due date. The penalty is generally 0.5% of your unpaid taxes for each month or part of a month after the due date, up to a maximum of 25%. If you can't pay your taxes in full, setting up a payment plan can help reduce ongoing penalties and prevent collection actions.
Example: Using the same scenario where you owe $2,000 in taxes and pay 3 months late:
- Month 1: $2,000 × 0.5% = $10
- Month 2: $2,000 × 0.5% = $10
- Month 3: $2,000 × 0.5% = $10
- Total failure to pay penalty: $30
Remove or reduce a penalty
The IRS may be able to remove or reduce some penalties if you acted in good faith and can show reasonable cause for why you weren’t able to meet your tax obligations. For more information, see penalty relief.
What if I filed an extension for annual taxes?
Filing an extension is a good practice if you need more time to file; however, if you owe tax, you must still pay by the due date. Your tax preparer may have calculated an estimated payment for your extension. If you have not made a payment or are unsure of how much to pay, we recommend you file your taxes as soon as possible. If you need further guidance, please reach out via Messages. If you did not file an extension, you are accruing both failure to file and failure to pay penalties and interest.