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Unfiled Tax Return Penalties

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The largest penalty in most unfiled tax situations is the late filing penalty.  If tax returns have not been filed and taxes are owed, the IRS charges a penalty called a failure to file penalty.  The failure to file penalty can be significantly more than the failure to pay and interest penalty. For failure-to-file taxpayers, the IRS charges 5% per month of the tax amount owed each month up to a maximum of 25% of the total tax owed.

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There is also a failure to pay penalty and interest penalty on unpaid taxes.  The failure to pay penalty is .5 percent per month and caps out a max of 25%

                                                                             The interest penalty continues until the balance is paid.  The interest rate on unpaid federal taxes is tied to the federal short-term interest rate plus 3%.  Currently the combination of those two rates is approximately 6%.

Can penalties be waived?

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The penalties assessed by the IRS and NCDOR can be waived under certain circumstances.  Those waivers are based on either prior “good compliance” or “reasonable cause.”

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The IRS may provide administrative relief from a penalty that would otherwise be applicable under its First Time Penalty Abatement policy.

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You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the IRS First Time Penalty Abatement policy if the following are true:

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  • You didn’t previously have to file a tax return or you have no penalties for the three tax years prior to the tax year in which you received a penalty.

  • You filed all currently required returns or filed an extension of time to file.

  • You have paid, or arranged to pay, any tax due.

 

Reasonable Cause is based on all the facts and circumstances in your situation. They consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.

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The IRS will consider any sound reason for failing to file a tax return, make a deposit, or pay tax when due. Sound reasons, if established, include:

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  • Fire, casualty, natural disaster or other disturbances

  • Inability to obtain records

  • Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family

  • Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so

 

A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the failure-to-pay penalty.

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Tax Extensions

If you are facing the April 15th deadline and unable to file your tax return always get an extension.  There is never a situation where getting an extension will hurt you.  An extension requires the taxpayer to make a “good faith” estimate of their taxes.   If you estimate you will owe $1,000 and you owe $2,000, that’s ok.  If you estimate you will owe $1,000 and you owe $50,000 you may have a problem.  Once that return is filed it’s possible that the IRS could come back and say you didn’t have a valid extension because you didn’t make a good faith estimate of your balance due.  That is rare but it can happen.   Paying the tax due with the extension saves penalties and interest but file the extension even if you can’t pay any money with the extension.

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The extension extends the time to file the return to October 15th.   If you file after October 15th your extension is invalid and your return is considered late back from April 15th late filing penalty.  Tax extensions do not eliminate the late pay or interest penalty on balances.

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SFR or Substitute Tax Return

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If you don’t file a return eventually the IRS and NCDOR will file a substitute tax return (SFR) on your behalf so that they can assess a tax liability, penalties and start collection against you. It’s never a good idea to let this happen because the amount of tax and penalty assessed with a substitute tax return (SFR) is usually far greater than if you filed a return.

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Get Help with Unfiled Tax Returns

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Call (919) 266-3417 or email rhines@hinescpa.com to schedule a no obligation consultation on solving your unfiled tax return problems.  I have the software and experience to get your unfiled returns caught up.

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