Failure to File vs. Failure to Pay Penalties

Failure to File vs. Failure to Pay Penalties

Many taxpayers assume if they file an “extension” they will not be hit with penalties from the federal or state government. This is completely misunderstood and should be clarified to the taxpayer whenever filing for an extension or filing a return past the designated deadline.

What Is an “extension”?

The government allows taxpayers to file for an extension if they need more time to prepare their tax returns. You can only file an extension once, meaning there isn’t a second extension. It typically allows the taxpayer an additional 6 months to file their tax return.

(e.g. if the deadline is 04/15 a 6-month extension will allow the taxpayer to file by 10/15.)

Failure to File Penalty

By filing an extension, the taxpayer is letting the government know they will be filing a return on a later date. The taxpayer can choose to pay an amount with the federal and/or state extension or pay nothing ($0) with the extension.

If the taxpayer is due a refund then they will not have a failure to pay penalty and the government records an automatic extension.

If the taxpayer owes taxes to the government and does not file an extension, they will be impacted with the Failure to File Penalty.

The calculation for the penalty:

  • 5% of the tax due, after allowing for timely payments, for every month that the return is late, up to a maximum of 25%.
  • For fraud, substitute 15% and 75% for 5% and 25%, respectively.
  • For individuals and fiduciaries, the minimum penalty is the lesser of
    • $135, or
    • 100% of the tax required to be shown on the return

Exceptions

In rare cases, the government MAY waive the penalty if the reason for not filing an extension is considered a reasonable cause as opposed to willful negligence.

If this is the first time the taxpayer has ever had this penalty there is a higher likelihood the IRS may have this penalty.

Failure to Pay Penalty

Even if the taxpayer does their due diligence by filing an extension, if they owe taxes, they still may be impacted by the failure to file a penalty. The failure to pay penalty occurs when a taxpayer does not pay or prepay their taxes by the due date.

If the taxpayer is due a refund then they will not have a failure to pay penalty, as there were no taxes due to the government. 

If the taxpayer owes taxes to the government and does pay them via estimated taxes or with the extension, they will be impacted with the Failure to Pay Penalty.

The calculation for the penalty:

  • 5% of the total tax unpaid plus 1/2 of 1% for every month the payment of tax was late up to 40 months.
  • Not to exceed 25% of the total unpaid tax.

Exceptions

In rare cases, the government MAY waive the penalty if the reason for not paying the taxes on time if there is a reasonable cause as opposed to willful negligence.

If this is the first time the taxpayer has ever had this penalty, there is a higher likelihood the IRS may have this penalty. However, this penalty is harder to get waived than the Failure to Pay Penalty.

Quick Reference

Failure to File PenaltyFailure to Pay Penalty
RefundNONO
Tax Due No Extension FiledNo Payment Made with ExtensionYESYES
Tax Due Extensions Filed on timeNo Payment Made with ExtensionNOYES
Tax Due Extensions Filed on time Partial Payment Made with ExtensionNOYES (Reduced)
Tax Due Extensions Filed on time Full Payment Made with ExtensionNONO

How to avoid these penalties?

Taxpayers can avoid or reduce these penalties by paying estimated taxes or paying with their extension.

If a taxpayer knows they will owe taxes or always owes taxes and doesn’t know how much to pay they should prepay 10% over last year’s tax liability.

It is best practice for high-income earners to plan ahead by scheduling a meeting with their tax preparer by December 15th at the latest. While it is an extra service fee, this meeting will help reduce hefty penalties.

Who should schedule an estimated tax planning meeting?

  • Business Owners
  • Taxpayers with property sales
  • Taxpayers with stock sales
  • Taxpayers who are high-income earners
  • Taxpayers who owe taxes every year

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