What Is the Penalty for Filing Taxes Late?

7 Consequences of Unfiled Tax Returns and How to Avoid Penalties

Most people who live in the United States as well as US citizens who live anywhere else in the world, must file a tax return. For some, the requirement is easy, but for others, it’s an annual task surrounded by dread and procrastination. 

So, what happens if you don’t file your tax return? What’s the penalty for filing taxes late? The IRS imposes civil penalties on late filers who owe taxes, and people who don’t owe risk losing their refunds. 

Wondering what to expect if you file late? Take a look at these consequences and then keep reading to learn how to deal with penalties for filing late tax returns.

1. Failure-to-File Penalty

The IRS’s late filing penalty is called the failure-to-file penalty. It is 5% of your tax due and applies monthly for every portion of the month you are late. For example, if you file your tax return just a day or two late, you incur the full 5% monthly late fee. If you file four months and three days late, the IRS will impose five months’ worth of this penalty. 

This late filing penalty can get up to 25% of your balance, and it generally maxes out by the time you are five or six months late. The reason it can take an extra month is that if you’re also incurring a failure-to-pay penalty, the IRS will slightly lower the late filing penalty, and thus, it can take a bit longer to reach 25% of your balance. Let’s say you owe $100,000; this penalty can get up to $25,000.

1. Failure-to-Pay Penalty

On top of the late filing penalty, you’ll also get a failure-to-pay penalty. This penalty is 0.5 to 1% of your balance every month, and it can also get up to 25% of your balance due. Because it’s smaller, this penalty takes longer than the other one to max out, but typically, you can expect it to max out about 24 to 30 months after the filing deadline. 

That means if you file your taxes 2.5 years late, both of these penalties will have maxed out, and they will be 50% of your balance. Thus, if you owe $10,000, you will now owe $15,000.

1. Interest

When you file your taxes late, you will also incur interest on the balance. The IRS’s interest rate is the federal rate plus three. As of the second quarter of 2024, it’s 8% per year. While most loans compound monthly, the IRS compounds its interest every day. 

That means if you’re a day late, interest gets added to your account. The next day, interest gets assessed on top of the previous day’s interest, and it also applies to penalties. This trend continues until you pay your tax debt. Although the other fees will max out, the interest will continue to grow until you file the tax return and pay the tax debt.

1. Penalties When You Owe $485 or Less

As of 2024, the IRS has special late filing penalties for people who owe $485 or less. If you owe $485 or less, you will incur the failure-to-file penalty for the first and second months that you are late, but if you are more than 60 days late, the IRS will apply the minimum late filing penalty which is the lesser of $485 or 100% of your balance.

 Here’s an example. Say you don’t file, and you owe $100 on your tax return. If you file within 60 days, the IRS will assess the 5% late filing penalty, which is just $5 per month based on your balance due. However, once you’re 60 days late, the IRS will increase the penalties to the maximum amount. In this case, that’s 100% of your balance due, which is $100. 

1. Penalties for Filing Late If You Don’t Owe Anything

For personal income tax returns, there is no penalty for filing late if you don’t owe anything. However, you can face penalties for not filing all kinds of business returns that don’t show a balance due. 

If you don’t owe anything, you won’t incur a penalty, but if you’re due a refund, you won’t receive that either. In 2023, the IRS issued about 120 million refunds worth over $461 billion, but every year, taxpayers leave millions on the table because they don’t file.

1. Federal Tax Liens

Filing late won’t lead directly to a federal tax lien, but if you don’t file at all, the IRS may file a substitute for return on your behalf. This return allows the IRS to start the tax assessment process against you, and once the IRS has an idea of how much you owe, the agency can issue a federal tax lien against you. 

The tax lien attaches to all of your assets, and it creates a legal situation that allows the IRS to get the funds if you sell or borrow against those assets. This process takes a while, and you will get several notifications and opportunities to appeal. If you don’t take action on your late returns, the situation will escalate.

1. IRS Collection Levies

Once a tax lien is in place, the IRS can start to move forward with collection levies. A tax levy is when the IRS seizes your assets to pay off your tax debt. The agency can garnish your wages, take the funds from your bank account, and seize your personal or business property.

Deadlines for Filing Your Tax Return

Your individual tax return is due April 15th every year for the previous tax year. If this date falls on a holiday or weekend, the return is due the following business day. In very rare cases, the government may extend the tax return deadline—for example, during COVID, the IRS extended the regular due date for two years. 

If you cannot file on time, request an extension. That gives you until October 15th or the next business day to file. Technically, your payment is still due on April 15th, but because the late filing penalty is 10 times higher than the late payment penalty, getting an extension will save you a lot of money even if you don’t pay right away. Just make sure you remember to file by that October deadline. 

You get an automatic extension if you’re serving in a combat zone, you’re working abroad, or you’re in certain national disaster areas.

How to Avoid Penalties for Filing Taxes Late

Other than filing on time, you can attempt to avoid late filing penalties by doing the following:

• Make sure that you claim all deductions and credits correctly—the less you owe, the lower your penalty will be.
• Apply for a filing extension to give yourself six extra months—even if you don’t file by the extension, you will still buy some extra time because the IRS won’t start assessing the late filing penalty until October if you have an extension.
• Organize your financial records throughout the year—It’s much easier to file on time if you have the right paperwork in place, and if you’re a small business owner, you need to stay on top of your bookkeeping.
• Look into relief options—Depending on the situation, you may be able to get relief for filing late. For example, if you’ve filed late due to being in a national disaster area, the IRS may have offered automatic penalty relief for people in your situation. If you’re dealing with unreported foreign assets, you may be able to avoid penalties by using the Voluntary Disclosure Program.
•  Apply for penalty abatement—If you incur penalties for filing late, make sure you apply for penalty abatement. The IRS offers waivers for people who are usually compliant and/or people who had a serious reason for filing late.

What to Do If You Incur Penalties for Unfiled Tax Returns

There are two main ways that you incur penalties for unfiled tax returns. One, if you file your tax return late, the IRS will backdate the late filing and late payment penalties as well as interest to the due date. Two, if you don’t file at all and the IRS issues a substitute for return, the IRS will also backdate the penalties and base them on the amount shown due on the substitute return.

If you incur penalties for filing your tax returns late, first make a plan to pay your taxes. Then, ask for penalty abatement. This order helps you maximize the penalty waivers. In contrast, if you get a penalty waiver without making payment arrangements, you’ll incur more penalties on your account. 

In cases where the IRS has based the penalties on an SFR, review the SFR carefully, and if it overstates your tax liability, file a correct tax return. Reducing the amount of tax you owe, will reduce the penalties. Then, make payment arrangements and request penalty abatement. The only exception to this rule is if you’re likely to qualify for an offer in compromise. 

Note that this is not financial advice. You should always talk with a tax professional before using any of these strategies. You also need to consider your state taxes as well.

Get Help With Unfiled Tax Returns and Penalties

Are you behind on filing your tax returns? Want to get back on track while reducing late filing penalties as much as possible? Have you recently filed late returns and are facing intense penalties? Regardless of your situation, we can help. At the W Tax Group, we focus on finding individual and business taxpayers the best possible solutions to their tax problems. To get help now, contact us for a free consultation today.