Tax Penalties: Failure to File and Failure to Pay

Two of the most common penalties that taxpayers will run into are the Failure to File and the Failure to Pay penalties. This article will quickly outline what causes these penalties, who can be impacted by them, and how to avoid them.

The Failure To Pay Penalty:
Since the Failure to Pay Penalty is the more common of the two (and the less severe), I’ll start with it.

The Failure to Pay Penalty is pretty straightforward. Even if you file an extension, you need to pay all of your taxes by April 15th. Therefore, if you know that you are going to need to file an extension (for example: If you are a partner and a partnership, and you don’t receive your K-1 until later in the year), you still need to make sure that you estimate what you’re likely to owe, and pay that amount by April 15th (a postmarked check is fine, the important thing is that the check is in the mail.)

Here are the specifics of how the Failure to Pay Penalty works:

  • If you don’t pay your Federal taxes by April 15th, you will be assessed a failure to pay penalty of ½ of 1% for each month (or part of month) that your taxes are late, up to a maximum of 25% of your unpaid tax.
  • You will also be charged interest on your unpaid tax (in addition to the failure to pay penalty). The current rate is currently 4% per year.
  • If you fail to pay your California tax, California will assess an immediate 5% penalty, plus ½ of 1% per month, plus interest.

The big takeaway here is that the penalties for not paying California by April 15th are severe. So, if you don’t have enough money to pay both the Feds and California, pay your California tax liability first, then pay what you can to the IRS.

To avoid the penalty entirely: Pay all of your taxes by April 15th, even if you are planning on filing an extension.

The Failure to File Penalty:
The Failure to File Penalty is the more severe of the two penalties. As the name implies, this is the penalty that is assessed if you do not file your tax return by the due date (including extensions). If you don’t file an extension by April 15th, you may be subject to Failure to File Penalties. If you don’t file your tax return by October 15th, you will be subject to Failure to File Penalties.

The Failure to File Penalty is assessed as follows:

  • You will be assessed penalties of 5% of the unpaid tax for each month or part of month that your tax return is late, up to a maximum of 25% of your total unpaid tax
  • If you are more than 60 days late, your minimum penalty will be the smaller of $135 or 100% of your unpaid tax.
  • California conforms to Federal rules on the Failure to File Penalty, and will also assess these same penalties on your California tax liability. However, California will grant you an extension automatically, so there’s no need to file a separate extension by April 15th.

Importantly, the Failure to File penalty does not apply if you have paid all of your taxes, even if you haven’t filed an income tax return.

How to Avoid the Failure to File Penalty:

  • File an extension if you can’t finalize your tax return by April 15th.
  • If you are still waiting for information on October 15th (unusual, but it does happen, especially in cases of divorce), file a tax return using your best available information. You can always go back and amend your tax return later.

The Failure to File and the Failure to Pay penalty are two of the most commonly assessed penalties. The Failure to Pay penalty happens – sometimes people get a little overextended and don’t have money to pay their taxes. This is particularly true for self-employed people.

However, even if you don’t have money to pay your taxes, you should still file a tax return to avoid the Failure to File penalty. If you need help filing a late tax return, contact me right away.

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