Difference between Failure to File Penalty & Failure to Pay Penalty

The IRS imposes tax penalties for late tax returns and late tax payments, which can be costly for both individuals and businesses. In fact, the IRS penalty for late filing (failure to file) is much harsher than the penalty for late payment.

The tenfold difference in the penalty for not filing taxes can add up far more quickly than a penalty for not paying. Understanding the difference between these two penalties is crucial. 

It helps taxpayers avoid unnecessary fees and interest, and many tax advisory services and top tax companies in the USA stress the importance of atleast paying on time, even if you can’t pay in full.

Let’s understand these differences for effective tax planning, ensuring compliance, and mitigating potential financial burdens.

What is the IRS Failure to File Penalty?

The Internal Revenue Service (IRS) is a charge imposed for a failure to file a Penalty when a taxpayer neglects to submit their required tax return by the designated due date, even if a valid extension was obtained.

In simple terms, it’s a late filing penalty applied for missing the filing deadline, and the penalty is designed to encourage timely filing. 

The standard rate for the failure to file a penalty is 5% of the unpaid tax for each month or partial month that the return remains unfiled. And the penalty accrues up to a maximum of 25% of the unpaid tax, meaning it typically reaches its cap after five months.

What is the IRS Failure to Pay Penalty?

The failure to pay a penalty is a charge applied when you don’t pay the taxes you owe by the due date. The IRS assesses a failure to pay penalty when a taxpayer fails to remit the tax owed by the specified due date, if the tax return itself was filed on time.

The penalty begins to accrue the day after the tax payment due date. It is crucial to understand that filing an extension for a tax return does not extend the time to pay the tax.

The failure to pay a penalty applies as soon as taxes are unpaid after the deadline. 

This could happen in several scenarios: you filed on time but didn’t pay the full balance due; you filed an extension (thus avoiding a late filing penalty) but didn’t pay the expected tax by April 15; or the IRS adjusted your return or audited you, finding additional taxes due that you didn’t pay by the due date. 

Key Differences Between Failure to File and Failure to Pay

Aspect	Failure to File Penalty	Failure to Pay Penalty
Trigger	Not submitting a required tax return by the due date	Not paying the tax owed by the due date
Standard Monthly Rate	5% of the unpaid tax	0.5% of the unpaid tax
Maximum Penalty	25% of the unpaid tax	25% of the unpaid tax
Minimum Penalty	If more than 60 days late, a minimum of $510 (for returns due in 2025) or 100% of the tax due, whichever is less	No fixed minimum dollar penalty; it accrues from the first month on any unpaid amount. Even a one-day delay triggers the first 0.5% charge.
Special Adjustments	If both penalties apply in the same month, the failure-to-file portion for that month is reduced to 4.5% (so the combined penalty remains 5% total)	If you filed on time and have an IRS payment plan, the rate is cut in half to 0.25% per month during the plan.

How to Avoid IRS Late Filing and Payment Penalties

Avoiding IRS penalties requires proactive planning and a clear understanding of tax obligations. Here are some strategies to avoid or minimise IRS Late filing and potential penalties.

1. File Even If You Can’t Pay
   If you cannot pay your full tax bill by the deadline, file your tax return on time anyway, and that will avoid the 5% per month late filing penalty.
   
   The failure to file penalty is ten times higher than the standard failure to pay penalty. By submitting a tax return on time, even if the full amount due cannot be paid, a taxpayer significantly reduces their potential penalty exposure.
   
   In short, avoid the “penalty for late filing” at all costs, even if you expect to incur a payment penalty. 
   
   
2. Use IRS Payment Plans
   For any taxes you cannot pay by the due date, consider setting up an IRS payment plan. If a taxpayer is unable to pay their taxes in full by the due date, the IRS offers various payment options designed to help manage the debt and mitigate future penalties.
   
   A short-term payment plan allows taxpayers up to an additional 180 days to pay their tax liability in full. 
   
   Tip: If you know you can’t pay in full, it’s often wise to pay as much as you can by the deadline (to limit the accruing penalty on a smaller balance) and then enter a plan for the rest.
   
   
3. Request Penalty Relief
   The IRS may remove or reduce penalties if a taxpayer can demonstrate a valid reason for non-compliance. Two common avenues are reasonable cause relief and the First-Time penalty Abatement (FTA) program. 
   
   Reasonable Cause is a common ground for relief, applicable when a taxpayer acted in good faith but was unable to meet their tax obligations due to circumstances beyond their control. 
   
   The FTA may be available if a taxpayer has a clean compliance history, meaning no penalties were incurred in the prior three tax years. This relief can apply to failure to file, failure to pay, and failure to deposit penalties, even without demonstrating reasonable cause.

What to Do If You’ve Already Incurred a Penalty 

Receiving an IRS penalty notice can be alarming, but understanding the steps can help manage the situation.

1. Check Your IRS Notice
   The first and most crucial step is to review the notice or letter sent by the IRS. Read the notice carefully to understand which penalties were changed and for what timeframe.
   
   Ignoring these penalties can lead to escalating penalties, accruing interest, and eventually more severe enforcement actions, including tax liens or levies. 
   
   If a taxpayer fails to file a required return, the IRS may prepare a Substitute for Return (SFR) on their behalf. It is important to note that an SFR generally does not include any deductions or credits the taxpayer might be entitled to, often resulting in a higher assessed tax liability.
    
2. Apply for Penalty Abatement
   Once you know what penalties you have received, you can ask to have those penalties reduced. The IRS offers First Time Abatement (FTA) if you have a good record of compliance.
   
   When you contact the IRS for penalty relief, you should be ready with specific information. The IRS will want proof of the reasons that caused your non-compliance.
   
   You can reach out to the IRS as soon as you have your explanation and documents ready. You can call the toll-free number on your IRS notice to request penalty relief or send a written request for penalty abatement.
   
   The IRS may remove or reduce penalties if you can demonstrate “reasonable cause” for your inability to meet tax obligations, meaning you exercised ordinary care and prudence but were unable to comply due to circumstances beyond your control.

FAQs

1. Can I be charged both penalties at the same time?
   Yes, it is quite common for taxpayers to incur both the failure to file and failure to pay penalties if they neither submit their returns nor pay their taxes on time.
   
   
2. How long do IRS penalties accrue?
   Each penalty accrues until it reaches its maximum or the underlying issue is resolved. The total penalty for Failure to file is up to five months (25%), while failure to pay the penalty can continue to accrue at 0.5% per month for up to 5 months, capping at 25% of the tax. 
   
   
3. Does the IRS notify you immediately after a missed deadline?
   No, the IRS typically does not send immediate notifications. It might start sending you a notice a month or two after you miss a tax deadline.
   
   
4. What if I filed an extension but didn’t pay?
   It’s a common misconception that an extension gives you more time to pay. In reality, interest and penalties on unpaid taxes still accrue from the deadline. 
   
   
5. Are penalty rates the same every year?
   The penalty rates are subject to change and can be changed annually to account for inflation. 

Conclusion

Navigating IRS penalties can be very difficult for taxpayers.

The penalty for failing to file is harsher and reaches its maximum faster, while the penalty for failing to pay is lower but can last longer. 

It’s important to understand the difference between these penalties to avoid extra charges. The IRS imposes a much higher penalty for late filing than for late payment.

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