IRS Penalties: What They Are and How They Work

IRS penalties are charges added when tax obligations are not met on time or are handled incorrectly. These penalties are part of the tax system and apply in specific, defined situations.

This article explains the most common IRS penalties, how they are calculated, and what typically matters most when dealing with them.

🟢 WHY THE IRS CHARGES PENALTIES

Penalties are generally assessed when a taxpayer:

🔹 Does not file a required tax return on time

🔹 Does not pay taxes owed by the deadline

🔹 Underpays taxes throughout the year

🔹 Submits incomplete or incorrect information

Not all penalties apply in every situation, and many are avoidable.

🟢 FAILURE TO FILE PENALTY

The failure-to-file penalty applies when a required tax return is not filed by the deadline (including extensions).

Key points:

🔹 Typically calculated as 5% of unpaid tax per month

🔹 Applies for up to 5 months

🔹 Maximum penalty is generally 25% of unpaid tax

🔹 A minimum penalty may apply if the return is very late

This is usually the largest penalty the IRS assesses.

🟢 FAILURE TO PAY PENALTY

The failure-to-pay penalty applies when taxes are owed but not paid by the due date, even if the return itself is filed on time.

Key points:

🔹 Typically calculated as 0.5% of unpaid tax per month

🔹 Continues until the balance is paid or capped

🔹 Interest accrues in addition to the penalty

This penalty grows more slowly than the failure-to-file penalty.

🟢 WHEN BOTH PENALTIES APPLY

If a taxpayer does not file and does not pay, both penalties can apply at the same time.

In these cases:

🔹 The failure-to-file penalty is reduced slightly

🔹 The combined penalties are still higher than paying late alone

This is why filing on time is usually more important than paying in full.

🟢 OTHER COMMON IRS PENALTIES

In addition to filing and payment penalties, the IRS may assess penalties for:

🔹 Underpaying estimated taxes

🔹 Submitting inaccurate information

🔹 Failing to file required information returns

🔹 Missing certain business-related deadlines

These penalties depend on the type of return an

d the taxpayer’s situation.

🟢 INTEREST AND PENALTIES ARE DIFFERENT

Interest is separate from penalties.

Important distinctions:

🔹 Interest applies to unpaid tax balances automatically

🔹 It continues to accrue until the balance is paid

🔹 Penalties may stop once certain actions are taken

Even when penalties are reduced, interest usually remains.

🟢 CAN IRS PENALTIES BE REDUCED OR REMOVED?

In some cases, penalties may be reduced or waived.

Common situations include:

🔹 First-time penalty relief

🔹 Reasonable cause (such as serious illness or documented hardship)

🔹 Filing and paying as soon as possible

Relief depends on facts, timing, and filing history.

🟢 A PRACTICAL WAY TO LIMIT PENALTIES

In many cases, penalties are minimized by:

🔹 Filing returns on time, even if payment is delayed

🔹 Making partial payments when possible

🔹 Responding promptly to IRS notices

🔹 Avoiding repeated late filings

Taking action early usually limits the total cost.

🟢 NEED HELP WITH IRS PENALTIES?

IRS penalties are often manageable when addressed correctly and promptly.

At Pacific Change , we help clients:

🔹 Understand which penalties apply

🔹 File late or missing returns

🔹 Reduce penalties when relief is available

🔹 Coordinate payment or resolution options

If you’ve received a notice or are unsure what applies to your situation, we’re happy to help.