Understanding IRS Penalties

Tax LawApril 15 is the deadline to file your 2018 federal income tax returns or request an extension to file. As that date rapidly approaches, you might be asking, “What can the IRS do to me if I do not file my return or request an extension?” Or “What happens if I do file but don’t have the money to pay the tax due?”

Not everyone is required to file a return. Your earnings must exceed a certain amount before a return is required. For example, a single individual under the age of 65 must earn at least $10,400 before a return is required. A single individual 65 or older must earn at least $11,950. There are other statuses, such as “married, filing jointly,” “separately,” or “head of household.” If your earnings exceed the applicable threshold, then you must file a return.

What happens if you don’t file a required return? The willful failure to file a federal income tax return is a criminal offence prosecutable by the U.S. Department of Justice. In addition to the potential criminal penalty, there is a civil penalty assessed each month in the amount of 5% of the unpaid taxes. The penalty begins accruing the day after the return is due and can reach a maximum of 25% of the unpaid taxes.

If a return is filed more than 60 days after it’s due, it is subject to a minimum late filing penalty that is the lesser of 100% of the unpaid tax due on the return or a specific dollar amount adjusted for inflation. If you don’t have the money to pay your taxes when they’re due, file your return anyway in order to avoid these penalties.

If you file a return, but don’t pay the tax due, you will incur a “failure to pay penalty.” This penalty is ½ of 1% (.50%) of the unpaid taxes for each month, or part of a month, the tax remains unpaid after it’s due. The penalty cannot exceed 25% of the unpaid tax due. The IRS will waive this penalty if you can show reasonable cause for not paying the tax timely. Lack of money is not reasonable cause.

“What happens to these penalties if I file an extension?” A standard extension moves the filing deadline from April 15 to October 15. Requesting an extension will allow you to avoid the “failure to file penalty” for the period of the extension, i.e, April 15 to October 15. However, the “failure to pay” penalty will not be avoided unless you pay, or have paid, at least 90% of the actual tax owed by April 15, and you then pay the balance when you file the extended return.

The penalties discussed above are the main penalties applicable to most individual taxpayers. There are other penalties that could apply, but which are not discussed here, such as “the civil fraud penalty,” the “failure to pay proper estimated taxes penalty,” and “the penalty for failure to take required minimum distributions from retirement accounts when you reach age 70 ½.”

The bottom line — be sure you either file your tax return by April 15, or file for an extension to move your deadline to October 15. If you cannot pay the tax due, file the return anyway so that you avoid the “failure to file” penalty. If you do not pay the tax shown on the return, you will incur a “failure to pay” penalty; however, as explained in an earlier article, many times you can negotiate an “Installment Agreement” with the IRS after the return is filed.

If you have any questions, or if you are having difficulties dealing with the IRS, please contact Bailey & Galyen.