Failure to File vs. Failure to Pay Penalties

Many taxpayers don't realize that Filing Late is much worse than Paying Late.

• Failure to Pay: 0.5% per month.
• Failure to File: 5.0% per month.

The penalty for not filing is 10 times higher. Even if you cannot pay a single dollar of your tax bill, you should *always* file on time to avoid the crushing 5% monthly penalty.

The failure to file (FTF) penalty under IRC §6651(a)(1) is calculated as follows:

Rate: 5% of the unpaid tax for each month or part of a month the return is late.

Maximum: 25% of the unpaid tax (reached after 5 months of non-filing).

Minimum Penalty: If the return is more than 60 days late, the minimum penalty is the lesser of $510 (for returns due in 2024; adjusted annually for inflation) or 100% of the unpaid tax. This minimum penalty applies even if the tax owed is small.

• Calculation Example:
• Tax owed: $10,000
• Return filed: 3 months late
• FTF penalty: $10,000 x 5% x 3 months = $1,500

Important Detail: The penalty is based on the unpaid tax as of the original due date, not the total tax liability. If withholding or estimated payments covered the full tax, the FTF penalty is zero even if the return is late—because there is no unpaid tax to calculate the percentage against.

Partial Months Count as Full Months: Filing even one day into a new month triggers the full 5% for that month. A return that is 2 months and 1 day late incurs a 15% penalty (3 months x 5%), not 10%.

When both failure to file (FTF) and failure to pay (FTP) penalties apply to the same return, IRC §6651(c)(1) provides a coordination rule to prevent excessive combined penalties.

• The Coordination Rule:
• For any month where both penalties apply, the FTF penalty is reduced by the FTP penalty amount. In practice:
• FTF alone: 5% per month
• FTP alone: 0.5% per month
• Both together: 4.5% FTF + 0.5% FTP = 5% total per month

After 5 Months: The FTF penalty maxes out at 25% after 5 months. After that, only the FTP penalty (0.5% per month) continues to accrue, up to its own 25% maximum.

• Combined Maximum:
• FTF maximum: 25%
• FTP maximum: 25%
• Minus the coordination reduction (5 months x 0.5% = 2.5%)
• Effective combined maximum: 47.5% of the unpaid tax

Timeline of Combined Penalty Accrual:

This means the most severe penalty accumulation happens in the first 5 months. After that, the rate drops to 0.5% per month (FTP only).

Key Takeaway: Filing a return—even without payment—immediately stops the 5% monthly FTF penalty. The remaining FTP penalty of 0.5% per month is dramatically lower.

Filing an extension (Form 4868 for individuals, Form 7004 for businesses) extends the time to file but does not extend the time to pay.

• Impact on FTF Penalty:
• A valid extension moves the filing deadline (typically to October 15 for individual returns)
• If the return is filed by the extended deadline, no FTF penalty applies
• If the return is filed after the extended deadline, the FTF penalty starts from the extended due date, not the original April 15 date

• Impact on FTP Penalty:
• The payment deadline remains April 15 regardless of extension
• The FTP penalty (0.5% per month) begins accruing from April 15 if tax remains unpaid
• Interest also accrues from April 15

Reduced FTP Rate with Extension: Under IRC §6651(a)(2), if a taxpayer files an extension and pays at least 90% of the actual tax liability by the original due date, the FTP penalty rate may be reduced. This provision encourages taxpayers to make a good-faith estimated payment even when they cannot complete their return on time.

• Common Extension Mistakes:
• Filing Form 4868 but assuming it extends the payment deadline (it does not)
• Filing the extension after the original due date (late extensions are invalid)
• Not estimating and paying the tax liability with the extension request

Electronic Filing: Form 4868 can be filed electronically through IRS Free File or tax software. Making an electronic payment by April 15 and selecting "extension" as the payment type also serves as a valid extension without filing a separate Form 4868.

If a return is filed late but no tax is owed (because withholding, estimated payments, or credits fully covered the liability), the FTF and FTP penalties are both zero.

Why: Both penalties are calculated as a percentage of the "unpaid tax." If the unpaid tax is $0, the percentage of zero is zero.

• Common Scenarios Where This Applies:
• W-2 employees whose withholding exceeded their tax liability
• Taxpayers who made sufficient estimated tax payments throughout the year
• Taxpayers claiming refundable credits (Earned Income Credit, Child Tax Credit) that exceed their tax liability
• Taxpayers with no taxable income but who were required to file (e.g., to report health coverage)

Refund Claims: There is a 3-year window from the original due date to file a return and claim a refund (IRC §6511). After 3 years, the refund is forfeited. This is not a penalty—it is a statutory deadline for claiming overpayments.

Still File: Even when no penalty applies, filing late returns is important for starting the statute of limitations on assessment (generally 3 years from filing under IRC §6501). Without a filed return, the statute of limitations never begins, and the IRS can assess additional tax at any time.

The failure to file penalty is eligible for both First Time Abate (FTA) and reasonable cause relief. These are the two primary mechanisms for penalty removal.

First Time Abate (IRM 20.1.1.3.6.1): FTA is the simpler path. If the taxpayer meets the three requirements (clean 3-year penalty history, all returns filed, tax paid or arranged), the FTF penalty is removed without needing to explain why the return was late. FTA can remove both FTF and FTP penalties for the same tax period in a single request.

Reasonable Cause (IRC §6651(a)): If FTA is unavailable (e.g., because of penalties in prior years), reasonable cause requires demonstrating that ordinary business care and prudence were exercised but circumstances prevented timely filing. Common grounds include medical emergencies, natural disasters, and reliance on professional advice.

Requesting Both: A request can combine both bases: "I request penalty abatement under First Time Abate per IRM 20.1.1.3.6.1. In the alternative, I request abatement based on reasonable cause due to [circumstances]."

• Timing of Request:
• Penalties can be abated before or after payment
• If already paid, the abatement results in a refund
• Requests can be made by phone (800-829-1040) or in writing (Form 843)
• There is a 3-year window from the date of payment or 2 years from the date of assessment to request a refund of penalties paid (IRC §6511)

Partial Abatement: In some cases, the IRS may grant partial relief—for example, abating the FTF penalty but not the FTP penalty, or abating penalties for specific months but not others. This can happen when circumstances explain part of the delay but not the entire period.

The failure to file penalty applies to various return types, but the calculation and implications differ depending on the type of return.

• Form 1040 (Individual Income Tax Return):
• Due date: April 15 (or next business day)
• Extension: Form 4868 extends to October 15
• FTF penalty: 5% of unpaid tax per month, up to 25%
• Minimum penalty: $510 or 100% of tax (whichever is less) if more than 60 days late

• Form 1120 (C Corporation Income Tax Return):
• Due date: April 15 for calendar-year corporations (15th day of 4th month after year-end for fiscal year)
• Extension: Form 7004 extends 6 months
• FTF penalty: Same 5% per month structure
• Minimum penalty: Same $510 minimum applies

• Form 1065 (Partnership Return):
• Due date: March 15 for calendar-year partnerships
• Extension: Form 7004 extends 6 months
• Different penalty structure: IRC §6698 imposes a per-partner, per-month penalty rather than a percentage of unpaid tax
• 2024 rate: $235 per partner per month, up to 12 months
• Example: A 4-partner partnership filing 3 months late = $235 x 4 x 3 = $2,820
• This penalty applies regardless of whether any tax is owed

• Form 1120-S (S Corporation Return):
• Due date: March 15 for calendar-year S corps
• Extension: Form 7004 extends 6 months
• Same per-shareholder structure as partnerships: IRC §6699 imposes a per-shareholder, per-month penalty
• 2024 rate: $235 per shareholder per month, up to 12 months

• Form 990 (Exempt Organization Return):
• Due date: 15th day of 5th month after year-end (May 15 for calendar-year organizations)
• Extension: Form 8868 extends 6 months
• Penalty: $20 per day, up to the lesser of $10,000 or 5% of gross receipts
• For organizations with gross receipts over $1 million: $105 per day, up to $54,500

Key Distinction: For partnerships and S corporations, the penalty is per-partner/per-shareholder, which can result in substantial penalties for entities with many owners—even if no tax is owed. FTA relief and reasonable cause abatement apply to these penalties as well.

*Penalty amounts are subject to annual inflation adjustments. The figures cited here reflect amounts in effect as of the date of this guide.*