IRC Section 6651: Failure to File and Pay Penalties

Internal Revenue Code Section 6651 establishes penalties for not filing a tax return on time or not paying taxes owed by the deadline. These penalties are designed to encourage timely compliance with tax obligations. This section of the tax code provides the framework for how the Internal Revenue Service (IRS) calculates these amounts and outlines the circumstances under which they may be waived.

The Failure to File and Failure to Pay Penalties

The Failure to File penalty is assessed when a tax return is not filed by its due date, including any valid extensions. The penalty is calculated at a rate of 5% of the unpaid taxes for each month or part of a month that the return is late. This penalty is capped and cannot exceed 25% of the total unpaid tax liability. For example, if a taxpayer owes $10,000 and files their return three months late, the Failure to File penalty would be $1,500.

A separate penalty, the Failure to Pay, applies when taxes are not paid by the original due date, even if the return was filed on time. This penalty is smaller, accruing at a rate of 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. Similar to the filing penalty, this also has a maximum limit of 25% of the unpaid tax. If a taxpayer with a $10,000 liability pays two months late, the Failure to Pay penalty would be $100.

When both penalties are applicable in the same month, a specific rule applies. The Failure to File penalty of 5% is reduced by the Failure to Pay penalty amount for that month, resulting in a combined maximum penalty of 5% per month. For returns filed more than 60 days late, the law mandates a minimum penalty, which is the lesser of $525 or 100% of the tax owed.

Establishing Reasonable Cause

The IRS may remove a penalty if a taxpayer can demonstrate they had “reasonable cause” for their failure to file or pay on time. Reasonable cause is established if a taxpayer can show they exercised ordinary business care and prudence but were still unable to meet their tax obligations. The determination is made on a case-by-case basis, and the IRS evaluates whether the taxpayer acted responsibly before and after the failure occurred.

Circumstances the IRS accepts as grounds for reasonable cause include events outside a taxpayer’s control, such as a fire, casualty, or natural disaster that destroyed records or the taxpayer’s home. The death or serious illness of the taxpayer or a member of their immediate family is another common reason. An inability to obtain necessary records to complete the return, despite prudent efforts, may also qualify.

Conversely, the IRS rejects certain explanations for late filing or payment. Forgetting the deadline or not knowing the filing requirements are not accepted as valid reasons. Relying on a tax professional who failed to file the return on the taxpayer’s behalf is not sufficient to establish reasonable cause. A lack of funds is not a valid reason for failing to file, though it may be considered for a failure to pay.

Requesting Penalty Abatement

One form of relief is the First-Time Abate (FTA) administrative waiver. To be eligible, a taxpayer must demonstrate filing and payment compliance. This means they must have filed all currently required returns and paid, or arranged to pay, all taxes due. The taxpayer must also have a clean penalty history for the preceding three years, excluding any estimated tax penalties.

If a taxpayer does not qualify for FTA, they can request an abatement based on reasonable cause. This request can be made by calling the IRS phone number found on the penalty notice or by submitting a written request. A written request should include the taxpayer’s name, taxpayer identification number, the tax period in question, and the specific penalty being disputed.

The written request must explain the facts and circumstances that constitute reasonable cause, detailing why the taxpayer was unable to file or pay on time. Attach copies of any supporting documents, such as death certificates, hospital records, or letters from insurance companies, that can substantiate the claim. For written requests, taxpayers can use Form 843, Claim for Refund and Request for Abatement.