If you owe money and don’t file your tax return by the deadline, the IRS charges what’s called a failure to file penalty. It’s calculated as a percentage of the total amount you owe, and it can add up fast.
There’s no charge if you don’t owe taxes, but it’s difficult to know whether you owe unless you file. Filing your taxes on time is the best way to avoid the penalty. Here’s everything you need to know.
In this guide:
How is the failure to file penalty calculated?
You must pay the failure to file penalty if you don’t file your taxes by the due date. But here’s the catch: The penalty only applies if you owe money for the tax year. You don’t have to pay the fine if the IRS owes you money.
The penalty is 5% of the amount you owe for each month you don’t file, up to 25%. For example, imagine you don’t file your taxes and owe $4,000, the IRS would charge a $200 failure to file penalty for the first month you don’t file.
The IRS charges the penalty each month until you reach the maximum of 25%. At that point, the failure to pay penalty, which is 0.5%, replaces the failure to file penalty. If your return is more than 60 days late, you must pay a minimum failure to file penalty of $450—or 100% of the tax required on the return, whichever is less. The IRS also charges interest on unpaid balances.
How do you know you have a failure to file penalty?
Before charging any penalties, the IRS will notify you of the failure to file penalty with a letter in the mail.
Tip block:
The IRS only communicates via written “snail mail” communications. Be wary of scams if you ever get a phone call or text claiming it’s the IRS. Check out the IRS’s consumer alerts about tax scams.
Here’s a sample letter:
Source: IRS
If you get a notice from the IRS and aren’t sure what it means, you can use the Notices and Letters Search to learn more.
How do you pay the failure to file penalty?
You can pay the failure to file penalty online with DirectPay from a bank account. You can also use a credit card, debit card, or digital wallet, but the IRS charges additional processing fees.
If you can’t pay your tax debt in full, you have options. Here are other ways you can handle the penalty:
- Payment plan: Taxpayers who can’t pay their balance in full, including penalties, can apply for a payment plan. You can typically apply for a short-term plan for 120 days if your balance is less than $100,000. You might be eligible for a more extended plan if your balance is less than $50,000.
- Remove or reduce: If you can prove reasonable cause for not filing or paying on time, you might be able to remove or reduce the penalty. Call the phone number at the top right corner of your notice to apply.
- Dispute: If you believe the penalty is inaccurate or disagree with the amount you owe, you can file a dispute. Call the phone number at the top right corner of your notice or mail a letter explaining why the IRS should reconsider the charges.
What if you don’t pay the failure to file penalty?
If you owe taxes and don’t pay the failure to file penalty, it maxes out after five months and converts to the failure to pay penalty. The failure to pay penalty is a monthly charge of 0.5%, up to 25%. The IRS also charges interest until you pay the bill in full.
Catherine Valega, CFP®, advises:
Typically, a failure to pay accompanies a failure to file. So when you don’t file, you face a significant penalty. If you file but can’t pay (and don’t understand your options), it’s a smaller penalty.
The most important part is always to file; if you can’t come up with the necessary tax payment, consult the IRS for a payment plan. Just not paying will make your situation worse. (Keep reading for more about this.)
How to avoid a failure to file penalty
Filing your taxes on time and paying your balance by the due date is the best way to avoid the failure to file penalty. But if that’s not possible, you have options. Here’s how you can handle the penalty and minimize charges.
- Apply for an extension: If you need more time to file your tax return, you can apply for an extension. Extensions can provide an additional six months to file your taxes. You must submit your request by the April tax deadline to qualify. An extension can give you more time to file your return, but you may still need to submit an estimated payment on the tax deadline to avoid penalties.
- Set up a payment plan: If you set up a payment plan with the IRS, you can reduce future penalties. In most cases, you can apply online for a payment plan. Setup fees range from $0 to $130, but low-income taxpayers can request a fee waiver.
You might be able to remove the penalty if it’s your first tax penalty or you have reasonable cause for not filing on time. Call the number on your tax notice to apply for First Time Abate or Reasonable Cause penalty relief.
According to Catherine Valega, CFP®, we can help others avoid such penalties by talking to our young relatives and colleagues about filing taxes:
Financial education must start early. Personal Finance 101 should be a mandatory class for all high schoolers and college students. Many young adults don’t understand why we pay taxes, how they benefit us (in terms of services in the community), and how the tax system works.
Failure to file penalties for individuals vs. businesses
Individual taxpayers must file tax returns and other applicable tax documents each year. Taxpayers can face the failure to file and failure to pay penalties if they don’t.
Businesses and corporations face the same penalties, but employers must file other tax forms as well. The IRS charges additional penalties if employers don’t file the correct forms and documentation.
We asked Catherine Valega, CFP®, about her experience with business taxes, and here’s what she told us:
I consult with clients who are business owners and advise them to establish their own board of advisors: a financial planner, an accountant/CPA, a bookkeeper, and an attorney. Many business owners know their trade but aren’t experts in taxes and other topics. Work with a team of trusted advisors that help will all this!
What is the failure to file W2 penalty?
Employers with W-2 employees must file W-2 forms with the Social Security Administration by January 31 each year to avoid penalties. Employers must file the form if an employee earns more than $600 or the employer withheld any income, Social Security, or Medicare tax from the employee’s earnings.
The IRS charges penalties if the employer fails to file by the deadline. Businesses must pay a $60 fine per W-2 form if it’s filed correctly within 30 days of the due date, up to $630,500 per year. The penalty increases to $120 per W-2 form if filing occurs more than 30 days past the due date. If employers do not file or file after August 1, the fee is $310 per W-2 form.
What is the failure to file a 1099 penalty?
Employers with 1099 employees, including freelancers and independent contractors, must submit 1099 forms by the deadline. The deadline for employers to file the 1099-NEC form is January 3. The deadline is February 28 or March 31 for the 1099-MISC form, depending on how it’s filed.
The penalties for failing to file a 1099 form are the same as those for failing to file a W-2—between $60 and $310 for each form, depending on how late the employer files.
Where to get help if you’re facing a failure to file penalty
Facing a failure to file penalty can feel overwhelming. You have options if you’re unsure how to handle the charges or need additional guidance. The IRS offers free assistance, and paid professionals are available as well. Here’s how to get the help you need.
- Contact the IRS: If you have questions about the penalty or want to set up a payment plan or remove the charges, you can contact the IRS. Call the phone number on your tax notice, or reach the IRS at 800-829-1040. If you can’t resolve the issue, contact the Taxpayer Assistance Service (TAS) for free guidance.
- Hire a tax professional: If your failure to file penalty is due to a complex tax issue, it might make sense to hire a tax professional to help you resolve it. You can work with a CPA, enrolled agent (EA), or tax lawyer, depending on the situation.
- Work with a tax relief company: If you have a large amount of tax debt and would prefer to work with a company that can deal with the IRS on your behalf, you can use a tax relief company. These companies have extensive tax experience and can advocate for you and find a solution.
>>Read more: Do tax relief companies really work?
