What Penalties Does the IRS Impose? What Are These Penalties For?

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Did you forget to file your business taxes on time? Or did you pay less than the required amount? You or your business may be subject to IRS penalties and fines. You must pay penalties for underpayment and for late payment, and you will have to pay fines and interest on the money due.

The IRS has several relief measures in place to help taxpayers during the ongoing public health and economic crisis, including interest on tax refunds and help with past-due tax returns. See the IRS general Tax Relief page for more information on tax relief for individuals/families, businesses, non-profits, and health and retirement plans.

Two Kinds of Tax Penalties + Interest

The IRS has two basic kinds of penalties. plus interest:

Failure-to-File penalties are for not filing a tax return on time, at 5% of the tax owed for each month or part of a month that the return is late, up to 25% of the tax owed.

Failure-to-Pay penalties are assessed at 0.5% (on the unpaid amount) if you file a return but don't pay all the tax owed by the due date. The penalty rate increases to 1% if the tax is unpaid after 10 days after the IRS issues a notice of intent to levy property.

If you have an IRS installment agreement you can get a lower penalty.

Interest on unpaid taxes is charged from the due date of the return until you pay in full. It's determined quarterly at the federal short-term rate plus 3% and it accrues (accumulates) daily.

Corporations can be charged interest on underpayment at the federal short-term rate plus 3% or at 5% for large corporations. They can also be charged interest in other circumstances:

  • On overpayments at 2% plus the federal short-term rates
  • On overpayments, at 0.5% for the part of overpayment exceeding $10,000

Payments are applied first to the tax owed, then to any penalty, then to interest.

Joint Tax Liability for Spouses

If you are filing a joint tax return, you and your spouse are both responsible for the full tax amount, including interest, and penalties due on underpaid tax or a tax return that wasn't filed.

You may qualify for relief from tax liability in certain circumstances:

  • Your spouse omitted income or claimed false deductions or credits
  • You are divorced, separated, or no longer living with your spouse
  • It wouldn't be fair to hold you liable for the tax, given your circumstance

There are other circumstances in which you might be able to claim spousal tax relief. Check with your tax professional for help with this situation.

Pay as Much as You Can As Soon as Possible

The most important thing to remember about IRS penalties and fines is that they stop adding up when you pay in full. So, the best way to keep these costs to a minimum is to pay as much as possible as soon as possible.

Tax Penalties and Small Businesses

Most small businesses are pass-through entities, because their business tax is included with their personal tax return. If you are a small business owner, you will pay IRS penalties and fines based on the amount you underpaid or paid late, based on your total tax due on your personal tax return (Form 1040/1040 SR).

Your total tax due is based on your income from all sources, including any pay from employment, business net income, and self-employment income from your business income.

Partnership, Corporate, S Corp Penalties

A partnership is penalized if it fails to file the return (Form 1065) by the due date, including extensions, or if it files a return and doesn't show all the information required unless it can show reasonable cause.

The late filing penalty for a partnership return is $205 for each month or part of a month (up to 12 months) the return is late (or doesn't contain the required information) multiplied by the total number of partners during any part of the partnership's tax year.

S Corporation tax returns, filed using form 1120S, can be penalized for both late filing and late payment. If no tax is due, the late filing penalty for returns is $205 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the shareholders in the corporation during any part of the corporation's tax year.

If tax is due, the penalty for late filing is the amount above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that's more than 60 days late is the tax due or 4535, whichever is smaller.

If your S corporation doesn't pay ta when due, the penalty is generally 1/2 of 1% of the unpaid tax for each month or part of a month the tax isn't paid, up to a maximum of 25% of the unpaid tax.

Corporations must pay a penalty if they don't make estimated tax payments on time. if the tax liability is $500 or more and the corporation didn't pay at least the smaller of its current year tax liability or the prior year's tax.

Many businesses need to make estimated tax payments, and the IRS can penalize you if you don't make quarterly estimated payments on time. Here's more information on how to figure out whether you need to make those estimated payments and how to pay them.

Other IRS Penalties

Several other penalties are related to the accuracy of the tax return. These penalties include:

  • Failing to disclose a reportable transaction (for corporations and S corporations)
  • Substantial underpayment of estimated tax (showing less than the correct tax; basically not completing the return correctly to show all income)
  • Negligence and disregard of the rules and regulations

And there are severe penalties for two kinds of activities:

Fraud. If there is any underpayment of tax on your return due to fraud (otherwise known as tax evasion) you may be charged penalties and be subject to criminal prosecution.
Frivolous Return. If you file a frivolous tax return, the IRS can impose a penalty of $5,000 on you (and a similar penalty on your spouse, if you file a joint return). The IRS says that a frivolous return is one that "does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect."

Penalty for Bounced Check

If the check you use to pay the IRS bounces, they can charge you a penalty. The penalty is 2% of the amount of the check or $25, whichever is more. If the check amount is less than $25, the penalty is the amount of the check. 

Penalty Relief From the IRS

Your business may qualify for penalty relief, for

  • Reasonable cause, based on your situation, like a natural disaster or unavoidable absence of the taxpayer family member
  • An administrative cause or a first-time penalty abatement
  • A statutory exception for incorrect written IRS advice

If you have what you think is a reasonable cause for not filing or not paying, tdon't attach an explanation to the return when you file. Wait for the IRS notice and send the explanation in reply. Get help from your tax professional if you think you may have one of these exceptions to penalties.