Introduction
Failing to file or pay taxes on time can lead to significant IRS penalties and interest charges. These penalties accumulate quickly, increasing your overall tax burden. Fortunately, the IRS offers penalty relief options, and there are steps you can take to reduce or eliminate late fees and interest.
This guide explains the most common IRS penalties, how they are calculated, which IRS forms to use, and how to comply with tax deadlines to avoid extra costs.
Common IRS Penalties & How They Are Calculated
The IRS imposes penalties under Internal Revenue Code (IRC) §6651 and IRC §6654 for failing to file, pay taxes, or underpay estimated taxes.
1.1 Failure to File Penalty (IRC §6651(a)(1))
- Applies if you do not file your tax return by the deadline (April 15, 2025).
- Penalty: 5% of unpaid taxes per month, up to a maximum of 25%.
- If more than 60 days late, the minimum penalty is $510 or 100% of unpaid taxes (whichever is lower).
Example:
- You owe $10,000 in taxes and file 3 months late.
- Penalty = $10,000 × 5% × 3 months = $1,500.
How to Avoid It:
- File Form 4868 (Automatic Extension) before the April 15 deadline.
1.2 Failure to Pay Penalty (IRC §6651(a)(2))
- Applies if you file on time but fail to pay the full amount due.
- Penalty: 0.5% of unpaid taxes per month, up to 25% maximum.
- If both Failure to File and Failure to Pay penalties apply, the total penalty is capped at 5% per month.
Example:
- You owe $5,000 and pay 6 months late.
- Penalty = $5,000 × 0.5% × 6 months = $150.
How to Avoid It:
- Pay as much as possible by the due date to reduce penalties.
- Request an IRS Payment Plan (Form 9465).
1.3 Underpayment of Estimated Tax Penalty (IRC §6654)
- Applies if you fail to make required quarterly estimated tax payments.
- The penalty is based on the IRS interest rate for underpayment (varies quarterly).
Who Must Pay Estimated Taxes?
- If you expect to owe $1,000 or more in taxes after withholdings.
- Self-employed individuals, freelancers, and small business owners.
Estimated Tax Deadlines for 2025
- April 15, 2025 – Q1 Payment
- June 17, 2025 – Q2 Payment
- September 16, 2025 – Q3 Payment
- January 15, 2026 – Q4 Payment
How to Avoid It:
- Pay 90% of your current tax liability or 100% of last year’s tax (110% if income >$150,000) using Form 1040-ES.
1.4 Accuracy-Related Penalty (IRC §6662)
- Applies if you underpay due to negligence, substantial understatement, or fraud.
- Penalty: 20% of underpaid taxes for negligence or 75% for fraud.
Example:
- If you underreport $10,000 in income, the penalty could be $2,000 (20% of $10,000).
How to Avoid It:
- Double-check your tax return and work with a CPA to ensure accuracy.
IRS Interest Charges on Unpaid Taxes (IRC §6601)
- The IRS charges daily interest on unpaid taxes and penalties.
- The interest rate is updated quarterly (typically 3%–7% per year).
Example:
- You owe $10,000 and pay 6 months late.
- If the IRS interest rate is 6% annually, you would owe $300 in interest for 6 months.
How to Avoid It:
- Pay as much as possible before the due date to reduce interest accumulation.
Step-by-Step Guide to Avoiding IRS Penalties
Step 1: File Your Tax Return on Time
- If you need more time, file Form 4868 (Tax Extension) to get until October 15, 2025.
- An extension gives you more time to file but NOT to pay.
Step 2: Pay at Least the Minimum Required Taxes
- To avoid estimated tax penalties, pay:
- 90% of your 2025 tax liability OR
- 100% of your 2024 tax liability (110% for high earners).
Step 3: Set Up an IRS Payment Plan (Form 9465)
- If you can’t pay in full, apply for a long-term or short-term payment plan.
- This reduces the Failure to Pay penalty from 0.5% to 0.25% per month.
Step 4: Request IRS Penalty Abatement (IRC §6404)
- If you normally pay on time, request First-Time Penalty Abatement (FTA).
- Call the IRS at 1-800-829-1040 or submit a written request.
Step 5: Negotiate an Offer in Compromise (Form 656)
- If you can’t afford to pay, apply for an Offer in Compromise (OIC) to settle for a lower amount.
Frequently Asked Questions (FAQs)
1. What happens if I file my taxes late but don’t owe money?
If you don’t owe taxes, there is no penalty for late filing. However, if you are due a refund, you must file within 3 years to claim it.
2. Can I negotiate IRS penalties?
Yes, you may qualify for penalty abatement, payment plans, or an Offer in Compromise.
3. Will the IRS waive penalties due to hardship?
The IRS may waive penalties for reasonable cause, such as medical emergencies or natural disasters.
4. Can I reduce my penalty if I partially pay my tax bill?
Yes. Paying part of your taxes reduces the failure-to-pay penalty and interest.
5. Does the IRS charge interest on penalties?
Yes, interest accrues on both unpaid taxes and penalties until fully paid.
Conclusion
IRS penalties and interest can significantly increase your tax bill, but you can avoid or reduce them by filing on time, making estimated payments, and setting up payment plans. If you owe a large tax bill, seeking professional tax advice can help minimize penalties and negotiate with the IRS.
About Our CPA
Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent admitted to practice before the IRS. He specializes in IRS tax penalties, tax debt resolution, and compliance for businesses and individuals.
For expert tax resolution services, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.
Disclaimer
This article is for informational purposes only and should not be considered legal or tax advice. Every taxpayer’s situation is unique. Consult a qualified CPA or tax professional before making tax-related decisions.