26 USC 6651: Penalties for Failure to File or Pay Tax

Federal tax law, specifically under 26 U.S.C. § 6651, establishes financial consequences for taxpayers who do not meet their filing or payment deadlines. These penalties are a common issue for individuals and businesses who miss the prescribed dates for submitting their tax returns or remitting the full amount of tax owed. The statute outlines a structured system of penalties that are calculated based on the amount of unpaid tax and the length of the delay. Understanding the framework of these penalties is a starting point for addressing compliance issues with the Internal Revenue Service (IRS).

The Failure to File Penalty

The Failure to File (FTF) penalty is assessed when a tax return is submitted after its due date, including any valid extensions. This penalty is not based on a failure to pay, but strictly on the tardiness of the filing itself. If a return is filed late and there is unpaid tax, the penalty is calculated at a rate of 5% of the net tax due for each month or part of a month the return is delayed. This calculation begins the day after the filing due date.

The penalty accrues over time but is capped at a maximum of 25% of the unpaid tax liability. For example, if a taxpayer owes $10,000 and files their return three months and one day late, they are considered four months late for calculation purposes. The penalty would be 20% of the unpaid tax, resulting in a $2,000 penalty. The calculation is based on the tax required to be shown on the return, reduced by any taxes paid on time, such as through withholding or estimated tax payments.

A more stringent rule applies for returns that are more than 60 days overdue, which mandates a minimum penalty. For tax returns due in 2025, this minimum is the lesser of $510 or 100% of the tax owed. If the IRS determines that the failure to file was fraudulent, the penalty rate increases significantly to 15% per month, with the maximum cap rising to 75% of the unpaid tax.

The Failure to Pay Penalty

The Failure to Pay (FTP) penalty applies when a taxpayer does not pay the taxes reported on their return by the original due date. This penalty is distinct from the one for late filing and can be assessed even if the return itself was filed on time. The penalty is calculated at a rate of 0.5% of the unpaid taxes for each month or part of a month that the tax remains outstanding. The calculation is based on the amount of tax shown as due on the return.

Similar to the late filing penalty, the FTP penalty has a maximum limit. It will continue to accrue monthly until it reaches 25% of the unpaid tax liability. If a taxpayer has filed their return on time and enters into a formal installment agreement with the IRS to pay the tax liability over time, the penalty rate is reduced. For any month in which an approved installment agreement under section 6159 is in effect, the FTP penalty rate is lowered to 0.25%.

Interaction of Penalties and Accrual of Interest

In any month where both the Failure to File (FTF) and Failure to Pay (FTP) penalties are applicable, a special offset rule is used. The 5% FTF penalty is reduced by the 0.5% FTP penalty, resulting in a combined maximum penalty of 5% for that month. The FTF portion is effectively 4.5%, while the FTP portion remains 0.5%.

Beyond penalties, the IRS also charges interest on underpayments. Interest is calculated on the base amount of unpaid tax from the original due date until the date of payment in full. The interest rate is determined quarterly and is set at the federal short-term rate plus three percent, compounding daily. Interest also accrues on the FTF and FTP penalties from the date they are assessed.

Requesting Penalty Abatement

The IRS has the authority to remove, or abate, penalties in certain situations. One of the primary grounds for penalty relief is demonstrating “reasonable cause.” This standard requires a taxpayer to show they exercised ordinary business care and prudence in trying to meet their tax obligations but were unable to do so due to circumstances beyond their control. Common examples that may constitute reasonable cause include the death or serious illness of the taxpayer or an immediate family member, or a fire, casualty, or natural disaster that destroyed the taxpayer’s records. Another accepted reason is reliance on erroneous advice from a tax advisor who was supplied with all necessary and accurate information.

A separate avenue for relief is the IRS’s administrative waiver known as First-Time Abate (FTA). This policy allows taxpayers to request the removal of failure-to-file and failure-to-pay penalties for a single tax period if they have a history of good tax compliance. To qualify for FTA, a taxpayer must have a clean compliance history for the three preceding years with no penalties assessed.

To be eligible for FTA, the taxpayer must also be current on all tax return filings or have filed a valid extension. Additionally, they must have paid or arranged to pay any tax due, which can be done through an installment agreement.