Failure-to-File vs. Failure-to-Pay: Understanding the Consequences of Overdue Taxes

One of the lesser known but still significant ways to get on the bad side of the IRS is to either fail to file your tax returns, known as failure-to-file, or file your tax returns, but fail to pay, known as failure-to-pay. In both cases, the IRS does not receive all of which it is due, it does not take it well, and the burden stays firmly on the taxpayer to remedy the situation. Here’s what you need to know.

Of the two, failure to file is the more serious of the offenses simply because the IRS gets neither the return nor payment from the taxpayer. In this case, the IRS can levy a penalty of up to 5% of the unpaid taxes for each month or partial month that the return is not filed.  In general, this penalty will not exceed a total of 25% of the unpaid tax.  However, if the return is filed more than 60 days after the due date (or extended due date), the IRS will impose a minimum penalty of $135, or 100% of the tax, whichever is smaller.

The longer the taxpayer waits to file, the more the penalties will be simply because they accrue for as long as the returns are not filed. For taxpayers who owe taxes and cannot pay them, this further compounds their liability since they now will be on the hook not only for the unpaid taxes, but for the penalties assessed for failing to file their returns. The best way to fix this particular problem is to file. File as soon and as accurately as possible so as to avoid an even heftier penalty for failing to file in the first place.

The flip side of this coin is the failure-to-pay problem. In this scenario, the taxpayer files the return but fails to pay the owed taxes. Again, a penalty is assessed, but since the return was filed, it is at least not as onerous as the failure-to-file penalty. Still, the penalty is usually set at 0.5 percent per month of the unpaid taxes with the potential to build up to as much as 25% of the unpaid liability.

In the situation where there is both failure-to-file and failure-to-pay, the IRS caps the maximum amount charged for both violations at 5 percent per month with a maximum of 25%.. Keep in mind that it is possible to fail to file but not fail to pay as in the case where the taxpayer is actually owed a refund but does not file.

So, what’s a taxpayer to do? Well, the first and most obvious answer is, file on time and pay on time. But, sometimes, this isn’t possible. The next best thing, then, is to get an extension of time to file your tax return. If you file under an extension and you owe, you will owe interest on the taxes you pay after April 15th, but at least you have the permission of the IRS to wait to file. To take advantage of this benefit, however, you must have paid at least 90% of the liability by April 15th and be able to pay the remaining 10% by the extension deadline.

If you have “reasonable cause” as to why the return was not filed or payment was not made, or both (think natural disaster, civil unrest, etc), then you can ask the IRS to abate these penalties.  Of course, the first and best move to take with anything related to taxes is to contact a skilled attorney who is familiar with tax laws and the IRS who can advise you on the best course to avoid these penalties in the first place, or at least mitigate the impact.

I have experience dealing with the IRS and can help you understand your responsibilities and rights when it comes to your taxes. Contact me today to set up an appointment.

Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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