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The Internal Revenue Service (IRS) has announced the annual inflation adjustments for the tax year 2021 – and that includes penalty amounts. Here’s a quick look at some of the most common:
Failure-To-File Penalty
It’s important to file even if you can’t afford to pay because the IRS imposes a failure-to-file penalty if you don’t file your tax return on time. The penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late (unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits). For returns filed in 2022 (generally, your 2021 return), if your return is over 60 days late, the minimum failure-to-file penalty is the smaller of $435 or 100% of the tax required to be shown on the return.
Failure-To-Pay Penalty
If you don’t pay what you owe on time, there is a penalty. The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.
It’s worth it to reach out to the IRS when you owe because that penalty rate can go down. For example, the penalty rate is 0.25% for each month or part of a month while you have an installment agreement. And you won’t have to pay the penalty at all if you can show reasonable cause for the failure to pay on time.
But, if you wait until the IRS issues a levy, the penalty rate goes up. Once ten days has passed since the IRS issued a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month.
Failure-To-File and a Failure-To-Pay Penalty
If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%.
If after five months you still haven’t paid, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%.
The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.
What About Interest For Individuals?
Interest accrues on the unpaid balance and is compounded daily from the due date of the return (without regard to any extension of time to file) until you pay in full. Even if the IRS abates any related penalties, the interest will almost always continue to accrue until the balance is paid.
The interest rate for taxpayers other than corporations (so, generally, individuals) is the federal short-term rate plus 3%. The federal short-term rate is determined every three months.
Failure-To-File Penalty for Pass Through Entities
It’s not just individual tax returns that can result in penalties. You can be subject to failure-to-file penalties for certain pass-through returns even if there is no tax due. For 2021, in addition to penalties for willful failure to file, those include:
- For partnership returns (§ 6698(b)(1)): $210, multiplied by the number of partners in the partnership during any part of the taxable year per month.
- For S corporation returns (§ 6699(b)(1)): $210, multiplied by the number of shareholders in the corporation during any part of the taxable year.
Failure-T0-File Correct Information Returns and Payee Statements
Penalties also apply for failure to timely provide correct information returns and payee statements. Those penalties can vary depending on the size of annual gross receipts and can escalate quickly. Most notably, there is no maximum penalty for failure to file correct information returns due to intentional disregard of the filing requirement.
Tax Preparer Penalties
Yes, tax preparers can be subject to penalties, too. For 2021, those include:
- Failure to furnish copy of a return to taxpayer: $50 per return up to a maximum penalty of $27,000
- Failure to sign return: $50 per return up to a maximum penalty of $27,000
- Failure to furnish identifying number: $50 per return up to a maximum penalty of $27,000
- Failure to retain copy or list: $50 per return up to a maximum penalty of $27,000
- Failure to file correct information returns: $50 per return up to a maximum penalty of $27,000
- Endorsing or otherwise negotiating any check issued to a taxpayer under § 6695(f): $545 per return with no maximum/limit
- Failure to be diligent in determining eligibility for head of household (HOH) filing status, child tax credit, American opportunity tax credit, and earned income tax credit (EITC): $545 per return with no maximum/limit
You can review the cost of living adjustments for penalties in Revenue Procedure 2020-45 (downloads as a PDF).