It is painful to receive an IRS penalty notice. All taxpayers are expected to file by the April 15 even if they are not able to pay all the taxes owed. Most taxpayers when they do not have the funds to pay their tax liability they choose not to file.
People are surprised to find out the IRS penalty is more costly when you choose not to file.
By law, the IRS can assess penalties:
1. IRC Section 6651 (a)(1) (aka Failure to File Penalty)
2. IRC Section 6651(a)(2) (aka Failure to Pay Penalty)
Things You May Not Know About The Failure to File (FTF)
– The penalty period extends from the prescribed due date, including valid extensions, to the date the Service receives the return.
– If the taxpayer has a valid extension of time for filing a return, he/she is not liable for the FTF penalty for the duration of the extension period.
– The FTF penalty is 5 percent of the amount of the tax required to be shown on the return for each month, or fraction thereof, that the failure continues, not to exceed 25 percent of the tax.
– Taxpayers who file their return more than 60 days after the due date or extended due date face a minimum penalty of $135 or a maximum penalty of 100 percent of any unpaid tax.
Things You May Not Know About The Failure to Pay (FTP)
– IRS imposes a penalty on a failure to pay the full amount of liability by the original due date of the tax return, for individuals this is April 15.
– There is no extension after April 15 to pay your tax liability without penalty and interest.
– The FTP penalty is one-half of 1 percent (.005) of the unpaid tax for the first month the penalty applies and an additional one-half of 1 percent (.005) for each additional month or fraction of the month the tax is unpaid, not to exceed 25 percent of the tax.
Which one is worse?
They are both bad. If you have to chose one, I recommend that you file even if you can’t pay the tax liability at the moment. After you file, there are ways to negotiate with the IRS. Also, the penalties that can be imposed due to a failure to file or pay taxes in a timely manner can be abated if a taxpayer can show reasonable cause or otherwise prove that the failure was not due to willful neglect. If you need help, please contact us to help you develop a strategy to correct tax compliance issues.