How Much Is the IRS Failure to Pay Penalty?
Understand how the IRS calculates the Failure to Pay penalty and compounding interest. This guide details the financial mechanics and relief procedures.
The Internal Revenue Service (IRS) assesses a Failure to Pay penalty on taxpayers who do not pay the taxes they owe by the established deadline. This charge is separate from interest and other potential penalties, such as the Failure to File penalty, and is a key part of managing an outstanding tax balance.
Calculating the Penalty Amount
The Failure to Pay penalty is calculated at a rate of 0.5% of the unpaid taxes for each month or part of a month that the taxes remain outstanding. This calculation is applied to the total tax required to be shown on the return minus any amounts already paid through withholding, estimated tax payments, or refundable credits. The penalty continues to accrue monthly until the tax is paid in full, but it is capped and will not exceed 25% of the total unpaid tax liability.
For example, if a taxpayer has an unpaid tax bill of $5,000, the penalty would be $25 per month. If a taxpayer is also subject to the Failure to File penalty in the same month, the 5% Failure to File penalty is reduced by the amount of the Failure to Pay penalty. This results in a 4.5% Failure to File penalty and a 0.5% Failure to Pay penalty, for a combined total of 5% for that month. For returns filed more than 60 days after the due date, the minimum penalty is the lesser of $510 or 100% of the tax owed.
The penalty rate can change based on certain circumstances. If a taxpayer has an approved installment agreement with the IRS, the rate is reduced to 0.25% per month for the duration of the plan. Conversely, if the IRS issues a notice of intent to levy property and the tax remains unpaid 10 days after the notice, the penalty rate increases to 1% per month.
Interest on Unpaid Tax and Penalties
The IRS also charges interest on any underpayment of tax, which accrues on the unpaid balance from the original due date until the tax is paid in full. An extension to file a tax return does not extend the time to pay, and interest will still apply to any tax not paid by the original deadline.
Interest is also charged on the penalties assessed, not just the original unpaid tax, creating a compounding effect. This can significantly increase the total amount owed over time. The interest is compounded daily, based on the new balance of tax, penalties, and previously accrued interest.
The interest rate is not fixed; it is determined quarterly and is set at the federal short-term rate plus three percentage points. Because this rate can be adjusted every three months, the amount of interest can fluctuate. If a taxpayer receives a notice from the IRS, paying the full amount by the “pay by” date can prevent further interest charges.
Options for Penalty Relief
The IRS may remove or abate the Failure to Pay penalty if a taxpayer meets the criteria for one of three types of relief. These options are First-Time Penalty Abatement, reasonable cause, and statutory exceptions.
First-Time Penalty Abatement (FTA) is an administrative waiver for taxpayers with a history of good tax compliance. To qualify, a taxpayer must have a clean record for the three tax years preceding the penalty year. The requirements include:
- Filing all required returns.
- Having no outstanding requests for unfiled returns.
- Paying or arranging to pay any tax due.
- Having no other penalties (except for an estimated tax penalty) in the prior three-year period.
Reasonable cause is another basis for relief, determined on a case-by-case basis. This applies when a taxpayer exercised ordinary business care but was unable to pay on time due to circumstances beyond their control. Examples include death or serious illness of the taxpayer or an immediate family member, unavoidable absence, or the destruction of records by a fire, natural disaster, or other disturbance.
A statutory exception may also provide relief in specific situations defined by law. This is less common, but one such exception is when a taxpayer relied on erroneous written advice from an IRS employee. To qualify, the taxpayer must have provided the IRS with adequate and accurate information in their written request for advice.
How to Request Relief and Make Payments
The primary method for requesting penalty abatement is by filing Form 843, Claim for Refund and Request for Abatement. This form requires the taxpayer’s identifying information, the tax period, and the specific penalty being disputed. A detailed written explanation must be attached that states the grounds for the request and provides any supporting documentation.
In some cases, particularly for First-Time Abatement, a taxpayer can request relief by calling the number on their IRS notice. If the request is denied, taxpayers have the right to appeal the decision.
To prevent penalties and interest from continuing to accrue, taxpayers should address the underlying tax liability. Taxpayers can make payments directly to the IRS or explore formal payment solutions like an Online Payment Agreement. For those with significant financial hardship, an Offer in Compromise (OIC) may be an option to settle the debt for less than the full amount owed.