For individuals in the United States, tax returns and tax payments are both due annually on the filing deadline of April 15. But what happens if a person fails to file a return on time or fails to pay the tax due amount by the filing deadline? The IRS is forgiving, at least initially. Individuals who file and submit Form 4868 by the IRS filing deadline of April 15 will receive an automatic six-month extension to file their returns, giving them until October 15. Filing extensions are also available for individuals in the U.S. armed forces (and certain support personnel) when assigned to a combat zone or to a contingency operation, as well as for the spouses of such individuals. Extensions may also be granted to individuals affected by terrorism or military action or to those in a federal disaster area.
After the automatic six-month extension has lapsed, however, the IRS becomes less lenient on taxpayers. Penalties accrue—both for failing to file a return and for failing to pay the amount due. And, even worse, the interest on the unpaid tax balance accrues starting from April 15, not October 15.
FAILURE TO FILE
IRC §6651(a)(1) provides for a penalty of 5% of the tax due for filing a return after the return’s due date (determined with regard to any extension of time to file). The 5% penalty is assessed for each month or fraction thereof for a return filed after the due date; the penalty, however, is capped at a maximum of 25% after five months. The amount of tax that the 5% penalty applies to is reduced by any amount of tax the individual paid before the due date for payment of the tax or by any tax credit he or she is entitled to on the return. In other words, if the individual submits a partial payment before the original due date, the penalty only applies to the unpaid amount.
In addition, after the return is 60 days late, there’s a minimum amount of penalty, which is equal to the lesser of 100% of the tax due or $210 for 2017 (and adjusted annually for inflation). This also means that taxpayers who file their return late but owe no tax aren’t subject to a penalty. Taxpayers found to have filed their returns fraudulently, however, are subject to a penalty of 15% per month or portion thereof, with a maximum penalty after five months of 75%.
FAILURE TO PAY
An extension to file an individual income tax return isn’t an extension to pay the amount of tax due on the return. Even if a taxpayer applies for the automatic six-month extension using Form 4868, a penalty for failure to pay the amount owed begins to accrue as soon as the filing deadline has passed on April 15. IRC §6651(a)(2) provides for a penalty of 0.5% of the tax due on a return filed after the return filing deadline. The 0.5% penalty is assessed for each month or fraction thereof the return is late, and the additional penalty is also capped at a maximum of 25%. The 0.5% penalty is only applied to the amount of remaining tax due on the return, reduced by any portion of tax paid before the beginning of a month to which the penalty for failure to pay is applied.
In a month where both the failure to file and failure to pay penalties are applicable, the penalty for failure to file is reduced by the amount of the failure to pay penalty so that the two penalties aren’t additive. The exception to this rule is that the failure to file penalty can’t be reduced below the minimum penalty of the lesser of 100% of tax due or $210 for 2017.
The failure to pay penalty doesn’t apply to the amount due for estimated taxes required to be paid under IRC §6654 on the installment dates of April 15, June 15, September 15, and January 15 of the tax year. Additionally, the failure to pay tax penalty is reduced to 0.25% during any month for which the taxpayer is covered under an installment agreement for the payment of the taxes due.
PENALTY RELIEF
Penalties for failure to file and failure to pay taxes are assessed “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.” Making a mistake, relying upon erroneous advice, or ignorance of the law aren’t generally considered reasonable causes. The Internal Revenue Manual (IRM) does provide first-time penalty relief for taxpayers who are current with their tax filing and payments and who have had no prior penalties for the previous three years. Taxpayers with IRS installment agreements that aren’t in default are considered current with payments.
How does a taxpayer request relief from failure to file and failure to pay penalties? That’s determined by the individual’s current circumstances. A taxpayer can request the IRS to not assert penalties prior to automatic assessment by filing a penalty nonassertion request along with his or her paper or electronically filed tax return. If the IRS has already assessed a penalty, then the taxpayer can typically request an abatement of penalties by phone or by writing a penalty abatement letter. The taxpayer can also use IRS e-services to request penalty abatement. Finally, if the taxpayer has already paid the penalty due, a refund of the penalty can be requested using Form 843, Claim for Refund and Request for Abatement.
The first-time abatement penalty waiver is available for penalties assessed in a single tax period when the taxpayer hasn’t had “significant” penalties over the previous three years by demonstrating filing and payment compliance. If a taxpayer has an outstanding request for an unfiled return, the IRM states that the IRS should give a taxpayer the opportunity to become compliant before considering whether to abate the penalty.
The penalties for failure to pay and failure to file are significant. Taxpayers face a substantial hurdle to prove their noncompliance was due to reasonable cause and not willful neglect. Even if taxpayers can avail themselves of the first-time penalty abatement waiver by having a clean history of tax payment and compliance, they still will incur substantial stress during the process.
© 2017 A.P. Curatola
July 2017
