The IRS’s primary mission is to collect appropriate taxes from taxpayers. In the interest of enhancing tax compliance, the IRS applies various penalties under the Internal Revenue code as enacted by Congress. Some of the most common affecting the average individual taxpayer are Failure to File or Delinquency, Failure to Pay, and Accuracy or Negligence. Let’s examine why these penalties are assessed and, in the next article, if they qualify for removal or relief.
The most common penalties are Failure to File (FTF) and Failure to Pay (FTP). FTF simply means that a tax return in which tax is owed but not paid (the deficiency) is filed after the due date of the return, typically April 15 or after the October 15 extension. The penalty is 5% per month of the unpaid tax up to a maximum penalty of 25% (5 months).
Failure to Pay (FTP) signifies that the tax which is due by April 15 on a timely filed tax return is unpaid and carries a .5% monthly penalty on the balance due until the tax is fully paid or a maximum of 25% penalty is reached. However, during the first five months (at which the FTF penalty caps out) the two penalties run concurrently. The Failure to File for these five months is reduced by the Failure to Pay. So, effectively the FTF reaches its limit in 5 months at 22.5%. The FTP caps out in 50 months at 25%. So the overall combined maximum rate is 47.5%.
The Accuracy or Negligence penalty is applied at the IRS’s discretion when it deems there is a deficiency in tax due to negligence or willful neglect. This penalty is often applied at audit when it is determined there is unreported income and/or undocumented or improper deductions, exemptions and/or cost basis.
Let’s look at whether these penalties can be relieved or “abated” in the next article.
Jeffrey Mitchell, enrolled agent, with 26 years IRS and federal tax experience is your local Jacksonville IRS tax and penalty expert.