IRS Failure To Pay Penalty: What to Know

IRS Failure to Pay Penalty

If you don’t pay your taxes on time, in full, or at all, the IRS will assess a failure-to-pay penalty (FTP). Many people in this situation are scared to contact the IRS, or they decide not to file the tax return after finding out what they owe. This is not a good idea. There are serious consequences for unfiled or delinquent tax returns.

Remember, the IRS wants to work with you. If you set up a payment arrangement, the IRS cuts the FTP penalty in half. If you cannot afford a payment plan with the IRS, there are other options to consider.

When Does the IRS Charge the Failure to Pay Penalty?

The IRS assesses the failure-to-pay penalty anytime you pay your taxes late. A late payment refers to one that is after the regular due date. Remember, filing an extension, does not extend any payment due date, only the filing one. This penalty applies the very first day your taxes are late (generally after April 15th), and the IRS assesses this penalty monthly up to a maximum of 25% of the total tax owed or until the tax is paid in full.

How Much is the IRS Failure to Pay Penalty?

The FTP penalty ranges between 0.25% to 1% of the unpaid or outstanding tax amount. For example, if you owe $5,000, and your penalty is 1%, that equates to $50 for the month. Ultimately, the total FTP charges can amount to up to 25% of your balance.

The standard FTP penalty is 0.5% a month. If the IRS issues an intent to levy notice and you don’t respond, the penalty increases to 1% after ten days. If you enter into an installment agreement, this IRS tax penalty falls to 0.25% a month.

What’s the Difference Between the Failure-to-Pay and the Failure-to-File Penalty?

If you do not file your taxes, the IRS charges a failure-to-file penalty (FTF). The FTF penalty is 5% of your balance per month up to a max of 25% of your unpaid taxes. The IRS waives the failure-to-pay penalty in any month where the failure-to-file penalty applies. Five percent is the maximum amount the IRS charges when these two penalties occur in the same month. However, if fraud is involved, the penalties are higher.

How Is the FTP Different Than an Underpayment Penalty?

The IRS assesses the FTP penalty when taxes assessed remain unpaid after the payment due date. Generally, when you hear the term, “underpayment penalty,” this refers to taxpayers who failed to make estimated tax payments or didn’t pay enough in estimated taxes throughout the year. The IRS requires taxpayers who do not have sufficient holdings throughout the year to make estimated tax payments or face an underpayment penalty. You can avoid the underpayment penalty if:

You owe the IRS $1000 or less after subtracting estimated tax payments and/or withholdings you had during the year
If the IRS has 90% of what you owe for the current year, or 100% of what you owed for the previous year, whichever is smaller
Note: The 100% in the former rule becomes 110% if your adjusted gross income is $150,000 or more ($75,000 if married filing separate)

What Is the Interest on Unpaid or Underpaid Taxes?

In addition to penalties, the IRS assesses interest on all unpaid taxes owed. The interest rate can change every three months, and it is the federal short-term rate plus an additional 3%. As of 2017, the federal short-term rate fluctuated between 0.98 and 1.29%. That makes the interest rate on unpaid taxes between 3.98 and 4.29%, but it can be higher than that in some years. You can find the Applicable Federal Rates here.

The interest on unpaid taxes compounds. That means that once interest and penalties accrue, the interest gets assessed on those amounts as well as on the original tax owed.

Removing the Failure to Pay or Late Payment Penalty

The IRS offers penalty abatement for some taxpayers. In fact, first-time penalty abatement is available for the first year you incur the FTP penalty. To qualify, you must be late for the first time, or you must show the IRS that you had “reasonable cause” to pay late. The IRS accepts a wide range of reasons, and the agency handles each situation on a case-by-case basis. If you would like to read more about this, the IRS offers a publication reviewing penalties.

What If You Can’t Pay the IRS in Full?

If you cannot pay the IRS in full, there are a wide range of solutions for you. Setting up a payment arrangement with the IRS you can afford is one way to avoid enforced collections with the IRS. Furthermore, it also cuts the failure-to-pay penalty in half. If you have financial issues, you can look into obtaining a hardship status from the IRS or apply for an Offer in Compromise. Whatever the case, it is always a good idea to consult with a licensed tax professional. You can find one by going here.

To avoid owing taxes in the future, figure out why you owed a tax bill on the year you got behind. Then, take steps to avoid this situation on your future year's returns. For example, if you owe taxes because your boss didn't withhold enough from your paycheck, set up a payment plan, but also update your W4 so that your employer withholds more in the future. In contrast, if you ended up with a tax liability for a situation that isn't recurring (for example, you sold some investments), then you don't need to worry about changing anything for future years.