If you fail to file your tax return and that tax return has tax that is due, the IRS will actually issue a penalty against you. This penalty can apply to any type of tax return but is reserved for taxpayers who willfully neglect to file. This basically means if you have a very good reason for not being able to file your tax return, the IRS will forgive you.
Cost of a Delinquent Tax Return
If you fail to file your tax return it will cost you 5% of the total amount of net tax due per month the return is late. Net tax due means the amount of tax that is due on your return minus any payments made on or before the tax return is supposed to be filed.
The minimum failure to file penalty the IRS can charge you is the lesser of $135 or 100% of the net tax amount that is due on your return. The maximum failure to file penalty the IRS can charge you is 25% of the net tax amount that is due on your return.
For example, if you owe $10,000 dollars and you fail to file your return for 6 months, the IRS can only penalize you $2,500 because of the 25% cap.
Fraudulent Failure to File
If your return is determined to be a fraudulent return the penalty is much more severe. Each month you do not file your return due to fraud you will be charged a 15% penalty against the net tax due. The maximum penalty that can accrue overtime is 75% of the total net tax due. This type of penalty is usual given out to taxpayers that are not filing their return in an attempt to evade paying taxes.
When determining whether to apply the fraudulent failure to file penalty against a taxpayer the IRS will look for the following:
1. If the taxpayer cannot explain the reason for not filing their return.
2. If the taxpayer makes up things that do not agree with what the IRS is seeing in the case.
3. If the taxpayer has a history or not filing his return but has the ability to.
4. If the taxpayer tries to hide assets from the IRS.
5. If the taxpayer pays cash for expenses either business or personal when it would be normal practice to pay in another way.
6. Has filed in the past on time but this time has chosen not to.
Penalty for S Corporations & Partnerships
If you fail to file your tax return and you have an S corporation or partnership you will be assessed a penalty of $195 per partner, per month. This penalty will be assessed to you for up to 12 months.
Forgiving the Failure to File Penalty
The IRS will forgive you for filing your return late if you can prove you have reasonable cause to do so. Reasonable cause does not include being lazy and not filing your return because you did not want to.
This is where it gets tricky however; the IRS does not specify what it constitutes as reasonable cause. This basically means that each case will be looked at and reviewed by the IRS to determine whether you are entitled to have your penalties waivered.
Some questions the IRS will ask about whether to waive your failure to file penalty include:
1. What happened to cause you not to be able to file your return and when exactly did it happen.
2. What exactly prevented the taxpayer from filing a return and when was it resolved.
3. What was the taxpayer’s reaction in regard to not being able to file a return?
4. After the situation changed and the taxpayer was able to file a return, what were their actions?
Filing for Extension
All taxpayers have the option to file for a six month extension to actually file their return. If this extension is filed with the IRS by April 15th, the taxpayer will be required to file their tax return no later than October 15th without having the failure to file penalty affect them.
Even though the taxpayer is given a 6 month extension to file their return they are still liable for the amount of tax due on April 15th. If the amount of tax due is not paid by April 15th the IRS will charge interest of 0.5% per month until it is paid. The failure to pay penalty has a maximum cap of 25% of the net tax due.