What is the IRS Penalty for Paying Taxes Late?
The IRS is authorized to impose a penalty if you pay your taxes late. This is often referred to as the IRS late payment penalty or underpayment penalty.
If you owe taxes when they are due, the IRS will assess this penalty.
This late payment penalty is one of the most common penalties the IRS imposes.
If you have been charged a late tax payment 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 paying taxes late or if you are thinking, I haven’t done my taxes.
Penalty for Paying Taxes Late
The IRS is authorized to impose a penalty for any amount of tax that is not paid by the due date deadline. This includes tax you report on your tax return that is not paid and tax you do not report on your tax return that is not paid. The penalty is applied to the underpayment or unpaid taxes.
The late payment penalty applies to any part of a month that the tax remains unpaid.
This penalty applies to every type of tax, it is a penalty for late paying income taxes, penalty for late paying payroll taxes, etc.
Penalty for Taxes Listed on Your Tax Return
This penalty is found in I.R.C. § 6651(a)(2). The penalty applies to any amount “shown on the return” and is 0.5 percent of the tax. It is charged monthly for each month the tax isn’t paid (or the fraction of the month that the tax is not paid).
The penalty maxes out at 25 percent of the tax (or 50 months).
The amount of this penalty increases to one percent if the IRS gives you written notice of the tax and demand for payment. This notice is the pre-levy notice that gives you collection due process hearing rights. If you are wondering what the “Highest penalty for paying taxes late” is, it is this amount.
This rate is decreased to 0.25 percent in months that you have an installment agreement in place with the IRS. An installment agreement is just a payment plan that you can enter into with the IRS. The IRS offers monthly payment plans. This is one of the primary benefits of entering into a payment plan with the IRS.
Penalty for Taxes Not Listed on Your Tax Return
Section 6651(a)(2) imposes a similar penalty for failure to pay any amount “required to be shown on the return” by the due date deadline.
This penalty is the same amount and subject to the same rules described above. The difference is that the I.R.C. § 6651(a)(2) penalty is based on the tax you listed on your tax return and I.R.C. § 6651(a)(3) is based on the tax you did not list on your tax return. The later type of penalty is likely due to an IRS audit or other IRS adjustment that increased your tax.
The other difference between the two penalties is the timing. This penalty for tax not reported on your tax return does not start to run until 21 calendar days after the IRS sends you written demand for payment (if the amount is less than $100,000; if it is $100,000 or more the 21 days is only 10 days).
Failure to File Penalty: No Double Penalty
If you do not timely file your tax return, the IRS may impose a failure to file penalty for not filing a return by the deadline. This is a separate penalty, but it is provided for in the same Section 6651.
Congress added language to this code section that says that if both the failure to pay and failure to file penalties apply, the failure to file penalty is reduced by the amount of the failure to pay penalty. This reduction is made on a month-by-month basis.
Failure to Pay Penalty May Not Apply for Extended Returns
If you file an extension and you paid at least 90 percent of the tax due by the due date of your original return, you will not trigger a failure to file penalty if you pay the taxes in full by the extended due date.
For example, assume you file a timely extension in April and think your taxes will be $100,000. You remit $90,000 with the extension. When you prepare your return you confirm that you owe $100,000 in taxes. You pay this amount by the extended due date. There is no late payment penalty on the $10,000 shortfall.
This helps show why you might want to file a request for an extension of time to file your returns (it can also help you avoid late filing penalties).
No Statute of Limitations
The IRS can assess this penalty at any time. It is not barred by the three-year statute of limitations for filing tax returns or the ten-year statute of limitations on collecting taxes. Filing a tax return does not start the clock running for the IRS for this penalty.
As a practical matter, the amount of the penalty will likely already be at the maximum amount by the time either of the statutes of situations applies. Those who have back taxes probably will also have reached the maximum penalty.
How Much is the Penalty for Not Paying Estimated Taxes?
The late filing penalty is different than the penalty for not paying estimated taxes. These are two different penalties.
The estimated tax penalty applies when you are required to make estimated tax payments before your tax return is due. This is a deposit penalty in that you are being penalized for not advancing enough taxes before your tax return is due. You can read more about the estimated tax penalty here.
The penalty for paying taxes late starts the day after the date the tax return is due. This penalty applies even if you only fail to pay your taxes for one day.
What if No Tax Return is Filed?
The failure to pay penalty is not contingent on you filing a tax return. The penalty is triggered by a tax being due.
As a practical matter, the IRS may not impose this penalty if it does not know that a tax is due. The IRS knows that a tax is due if you file a tax return or the IRS assesses taxes for you.
So if you do not file a tax return, there is some chance that this penalty will not be imposed. It is more likely that the IRS will 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. Thus, the failure to pay penalty may be higher.
Is there a Failure to Pay Penalty if No Tax Due?
There is no failure to pay penalty if there is no tax due. This includes penalties and interest. The failure to pay penalty can be imposed even if you just have an outstanding balance for penalties and interest.
What if My Tax Liability Decreases?
The failure to pay penalty is reduced if the amount of your tax liability is reduced.
For example, if you reported more tax on your return and then filed an amended return that is accepted by the IRS, the failure to pay penalty should be reduced. The IRS’s computer systems are not good at tracking this. It is up to you (or your tax attorneys) to verify the calculations and request the IRS reduce the penalty in this situation.
Paying Taxes With Credit Card to Avoid Penalties
We are often asked whether you can pay your taxes with a credit card to avoid this penalty. The answer is yes, you can. The downside is that the IRS charges a fee to pay a tax debt with a credit card. You can find the current credit card fees on the irs.gov/pay website.
Paying With State Tax Refunds
Another way to avoid this penalty is to have any state tax refunds applied to the IRS balance. The problem with this solution is that the state may not issue a refund timely. However, if you submit your state tax return early and it generates a tax refund, you may be able to apply the state refund to minimize your IRS taxes and, possibly, avoid the failure to pay penalty.
How Much Interest Does the IRS Charge?
The courts have said that the failure to pay penalty is not interest. This is important as tax penalties are not deductible. Interest can be deductible in some cases.
Thus the penalty is a fee. Think of it as a tax late fee.
With that said, the IRS does impose interest on an unpaid tax. This interest charge is in addition to the failure to pay penalty.
Interest on tax debts begins to accrue from the time that the tax liability was to be paid, which is typically the date the tax return was filed or should have been filed.
You can find out more about IRS interest on the page that covers that topic.
Reasonable Cause Defense to the Failure to Pay Penalty
The failure to pay penalty does not apply if you have reasonable cause for not paying the tax and there is no willful neglect. This is the primary exception for when the penalty does not apply.
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 pay timely.
This defense applies to several other IRS penalties as well. This provides a number of situations that can be considered reasonable cause.
The IRS’s Internal Revenue Manual provides for reasonable cause in the following situations:
- 220.127.116.11.2.2.1 Death, Serious Illness, or Unavoidable Absence
- 18.104.22.168.2.2.2 Fire, Casualty, Natural Disaster, or Other Disturbance-Reasonable Cause
- 22.214.171.124.2.2.3 Unable to Obtain Records
- 126.96.36.199.2.2.4 Mistake Was Made
- 188.8.131.52.2.2.5 Erroneous Advice or Reliance
- 184.108.40.206.2.2.6 Ignorance of the Law or Error
- 220.127.116.11.2.2.7 Forgetfulness
There are other good reasons that may qualify as reasonable cause.
We write about many of the court cases that address reasonable cause. You can read these reasonable cause cases here.
The Financial Hardship Defense
There is also a hardship defense that applies to the failure to pay penalty. It is found in Treas Reg. § 301.6651-1(c)(1), which says that:
failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for the tax or would suffer an undue hardship… if he paid on the due date. In determining whether the taxpayer was unable to pay the tax in spite of the exercise ordinary business and prudence in providing for payment his tax liability, consideration will be given to all the facts and circumstances of the taxpayer’s financial situation, including the amount and nature the taxpayer’s expenditures in light of the income (or other amounts) he could, at the time of such expenditures, reasonably expect to receive prior to the date prescribed for the payment the tax.
The IRS’s IRM explains that:
An undue hardship may support the granting of an extension of time for paying a tax or deficiency (i.e., Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship). Treas. Reg. 1.6161-1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that he or she would sustain a substantial financial loss if required to pay a tax or deficiency on the due date.
The IRS’s IRM goes on to say that the following factors are to be considered in evaluating undue hardship:
- When did the taxpayer know he or she could not pay?
- Why was the taxpayer unable to pay?
- Did the taxpayer explore other means to secure the necessary funds?
- What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
- Did the taxpayer pay when the funds became available?
In our experience, the IRS does not address Forms 1127 submitted with tax returns. Instead, the IRS’s computer systems merely send a bill. It is then up to the taxpayer to request that the penalty be abated due to reasonable cause abatement or, as described next, based on the first-time abate policy.
The IRS’s First Time Abate Policy
The failure to pay penalty can often be removed pursuant to the IRS’s first-time abate policy. If it applies, this is the easy way to get the penalty removed.
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.
It is often best to wait until the tax balance is paid before requesting this type of abatement. Otherwise, the penalty will continue to accrue.
Get Help With Late Payment Tax Penalties
We are experienced tax attorneys in Houston, Texas. We help clients remove or abate IRS tax penalties.
If you have been assessed a late payment 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.