Tax Penalty for Failure To File Return
The IRS is authorized to impose a penalty if you fail to file your tax return. This is often referred to as the IRS late filing penalty.
This filing penalty is one of the most common penalties the IRS imposes.
If you have been charged a late filing penalty and are trying to determine whether it is valid and how to get out of the penalty, this page is for you. It is also for you if you are wondering, what is the penalty for filing taxes late?
Penalty for Filing Taxes Late
If you fail to file a tax return by the due date, there is a penalty equal to five percent of the tax due. The penalty applies each month or part of the month that the tax return is not filed. The penalty maxes out at 25 percent.
If the return otherwise subject to the penalty is filed more than 60 days after the due date, the minimum penalty is the lesser of $135 or 100% of the tax required to be shown on the return.
This failure to file penalty under I.R.C. § 6651(a)(1) runs from the due date of the return.
If your failure to file a tax return is fraudulent, the percentage is increased to 15 percent. The maximum penalty is increased to 75 percent.
What Types of Returns Does the Penalty Apply to?
This penalty applies to any type of tax return, including income tax returns, estate tax returns, gift tax returns, and most excise tax returns.
This penalty does not apply to information returns. Information returns are those that report taxes and other amounts to the IRS, but that does not report tax that has to be paid. Sections 6721 through 6724 impose penalties for failure to file and correct information returns. These provisions are separate from the failure to file penalty in Section 6651.
What if a Tax Return is Filed, But it is Late?
The penalty applies if you file late after the deadline. This is why it is often better to file a tax return, even if it is not a perfect tax return and even if you cannot pay the tax listed on the return.
While this avoids the late filing penalty for filing after the deadline, the lesser late payment penalty may still apply.
You have to be careful with an insufficient tax return filed to meet the filing deadline. Technically, the IRS can still impose this penalty if the return is found to be insufficient. The courts have generally found a tax return insufficient if it does not provide the IRS with the facts needed to know your tax positions. The document you file as your tax return has to contain sufficient data to calculate the tax due, must represent a reasonable attempt to satisfy the requirements imposed by our tax laws, and must be executed under penalties of perjury.
There have been numerous cases that address different types of documents that purport to be tax returns. For example, the courts have held that, generally, a return that contains only zeros is not a valid return. The courts have upheld failure to file penalties in these cases given that the tax returns were found to not count as tax returns.
What if No Tax Return is Filed?
The failure to file penalty rules makes it clear that the penalty only applies if you file a tax return. The penalty does not apply if you never file a tax return.
This raises the question as to “how long do I have to file my taxes?” The answer varies by type of tax return. For individual income tax returns, the tax return is due on April 15th of the subsequent calendar year. This date may be extended to the following non-holiday business days if the 15th lands on a weekend or holiday. This date may also be extended by the IRS for taxpayers impacted by presidentially declared disasters.
You can also extend this date by requesting an extension of time to file. Most tax returns can automatically be extended by filing forms provided by the IRS. Requesting an extension of time to file can help avoid the failure to file penalty if you file before the expiration of the extended due date.
This raises the questions, “What happens if you don’t file taxes” and “is it a crime not to file a tax return.” The answers are that if you do not file a tax return and a tax return is required, the IRS may file a return for you. This is referred to as a “substitute for return” or SFR. The SFR will usually not include tax deductions or credits you may be entitled to. Thus, taxes are almost always higher if the IRS files an SFR.
The IRS may also conduct an audit and assess tax that way.
The IRS can also make a criminal referral to the U.S. Department of Justice. It is a crime to fail to file a tax return when a tax return is required to be filed. While it is not all that common, the government does prosecute taxpayers who fail to file returns.
Is there a Failure to File Penalty if No Tax Due?
The law is also clear that this penalty does not apply if there is no tax due. This is a practical consequence of the calculation of the penalty. The penalty is computed based on the tax due. No tax due or unpaid tax, no penalty.
Tax payments and tax credits can help reduce the amount of tax due, resulting in no late filing penalty or a reduced penalty.
If you work and earn wages, this is why it is advisable to have sufficient withholdings from your wages. It can also help to make estimated payments throughout the year. These wage withholdings and estimated payments are factored into whether there is a tax due when computing the failure to file penalty.
This is also why it can be helpful to look for missed tax credits and deductions, as these efforts to reduce your tax liability can also reduce your tax penalty. A lower tax bill means a smaller penalty. Tax planning can help here.
Reasonable Cause Defense to the Failure to File Penalty
The failure to file penalty does not apply if you have reasonable cause for not filing the return and there is no willful neglect.
The question of whether you acted with reasonable cause is determined by the facts of the case. It requires you to have exercised ordinary business care prudence, but you were nevertheless unable to file timely.
This defense has been upheld where advice competent counsel resulted in a late filing or where a tax preparer had the records to prepare a return but failed to do so timely. However, there are more court cases that find no reasonable cause than there are for reasonable cause. This is likely due to the fact that the IRS commonly abates these penalties, leaving only the worst fact patterns to go on to court.
The leading case is United States v. Boyle, 469 U.S. 241 (1985). The Boyle case involved an estate tax return. The estate executor relied upon its lawyer to advise as to when the estate tax return was due and to make sure it was timely completed for filing. The Supreme Court held that the estate did not have reasonable cause because a reasonable taxpayer would have known that an estate tax return was due. The Court noted the difference between professional tax advice on substantive tax positions. Accuracy-related penalties are often abated for this reason, but typically not failure to file penalties.
The courts have mostly rejected arguments about failures due to tax preparation software. This so-called “turbotax defense” typically does not work. Treasury Secretary Tim Geithner was ridiculed for making this argument as an excuse for not paying self-employment taxes while he worked for the IMF.
We write about many of the court cases that address reasonable cause. You can read these reasonable cause cases here.
The IRS’s First Time Abate Policy
The failure to file penalty can often be removed pursuant to the IRS’s first-time abate policy.
The first-time abate policy is intended to give taxpayers who have a good track record of compliance a break. It applies if the taxpayer has not had any penalties, other than the penalty at issue, for the immediately prior three years.
The IRS only applies this policy to returns that are regularly filed, not to one-time returns. Estate tax returns are an example. Each individual only dies once (usually) and their estate files one estate tax return (usually). Thus, the IRS cannot look to their compliance history for this one-time return to determine whether they have a good track record for filing the return.
This remedy can be had by calling or writing to the IRS and asking that the IRS apply the policy and remove penalties. The IRS will not voluntarily apply this policy. You have to actually call or write to the IRS.
Get Help With Unfiled and Late Tax Returns
We are experienced tax attorneys in Houston, Texas. We help clients remove or abate IRS tax penalties. We can also help with late and unfiled tax returns.
If you have a tax penalty and you want it removed and want to talk to a tax lawyer, we want to hear from you. Please call us at (713) 909-4906 or schedule an appointment to get help abating your penalties.