What Is the IRS Failure-to-Pay Penalty? How to Avoid or Abate

About 2 out of every 3 Americans were living paycheck to paycheck in mid-2022, and unfortunately, big bills often become insurmountable in this situation. This includes tax bills. If you didn’t have enough withheld from your paycheck or are a freelancer/business owner who didn’t pay quarterly, you may have ended up with a tax bill and no money to pay it. 

Unfortunately, over time, even a small tax debt can grow into a much large one due to penalties and interest. If you don’t pay your tax bill, you will incur a failure-to-pay penalty, and the longer this fee goes unaddressed, the bigger the problem will become. Keep reading to learn more about the failure-to-pay penalty and how to overcome it.

The IRS Failure to Pay Penalty: An Overview

A failure-to-pay tax penalty won’t get levied against you as a surprise. You will only receive this penalty in the following situations:

• You filed your tax return but didn’t pay the bill. 
• The IRS made a change to your tax return which resulted in a tax liability, which you didn’t pay. 
• The IRS audited your tax return, made changes, and assessed a tax against you. Then, you didn’t pay the assessed tax. 

If the IRS adjusts or audits your return, the agency will send you a notice explaining when you need to pay and when the penalties will start to apply. If you file your return and don’t pay, the failure-to-pay penalty starts to accrue the first day you are late. 

Federal income tax returns are due April 15 or the following business day if it falls on a weekend or a holiday, and the late payment fee will apply if you don’t pay your taxes by this date. If you apply for an extension, your tax return won’t be due until October 15, but your taxes are still due in April. 

How Much is the Failure-to-Pay Penalty?

The total amount of your failure-to-pay penalty will hinge on how long your taxes go unpaid. Each month or portion of a month that your tax debt continues to be overdue, the IRS will add an additional 0.5% fee to the total. For instance, if you pay one day late and you owe $10,000, your penalty is $50.

The IRS has the authority to charge up to 25% of the overall unpaid tax amount for this penalty. To put that into perspective, that means that an unpaid $100,000 tax bill can incur a $25,000 failure-to-pay penalty as well as other interest, penalties, and collection charges. 

The failure-to-pay penalty will also be increased to up to 1% a month if you’ve received an intent to levy from the IRS and you still fail to pay your tax within 10 days of that notice.

Unfortunately, even if you agree to a payment plan with the IRS, you might still be charged a failure-to-pay penalty. The good news is that it will be slightly lower, at only 0.25% per month.

Failure-to-Pay Vs Failure-to-File Penalty: What’s the Difference?

You will also be charged a failure-to-file penalty if you don’t submit your returns by the filing deadline. This penalty is for filing late, while the other penalty is for paying late.

If you have both a failure-to-pay and a failure-to-file penalty levied against you at the same time, then the failure-to-file fee will get reduced by the amount of the failure-to-pay fee. In other words, if you’re getting charged 5% for failing to file, then the IRS will reduce your failure-to-file fee to 4.5% so that they can still charge you the 0.5% for failing to pay.

How to Avoid the Failure-to-Pay Penalty

You can avoid being burdened with these penalties by following the rules laid out by the IRS and taking advantage of the allowances the agency offers. The best way to avoid penalties is to file your taxes on time and pay them by the due date. If you know you won’t be able to pay your taxes, don’t simply hope the problem goes away. 

Instead, take advantage of the options available to you. Ask the IRS to set you up with a payment plan or look into other tax relief options. You might still face penalties if you’re on a payment plan, but they won’t be as high as if you simply ignore the IRS’s attempts to collect payment.

You can also potentially avoid a penalty by disputing it. If you want to dispute the penalty, call the number on the letter you receive from the IRS. Before you call, think carefully about your reasons for disputing the penalty. You should have ready any supporting documents and information that might help you. That way, you can rely on your evidence to back up your claim on the phone. If the IRS requests the documentation, then you can send it along with a signed letter explaining your request to dispute the penalty.

Can the Failure to Pay Penalty be Abated?

If you attempt to comply with the tax laws in good faith but could not do so due to circumstances beyond your control, then you may qualify for penalty relief. The failure-to-pay penalty is one of the types of fees that can be abated.

If you’re curious about how to request penalty relief, you’ll first want to look at the IRS notice you received. This notice should have a phone number in the top right corner. You can call this number to request penalty relief. On the call, you’ll want to explain why you think the IRS should remove your penalty. 

Depending on the type of relief you’re after, the agent can either approve your relief over the phone or direct you to the proper forms to fill out to request an abatement. Generally, you need to file Form 843 if you want penalty abatement. Here are the two main circumstances where the IRS will remove penalties. 

First-Time Penalty Abatement

If you’ve never faced a tax penalty and have a good tax compliance history, you can likely qualify for a first-time penalty abatement. Tax compliance is usually defined as filing on time for the past three years without getting any penalties.

Reasonable Cause

Another type of penalty relief you might be eligible for is a reasonable cause dismissal. The IRS determines whether taxpayers are eligible for this type of tax relief on a case-by-case basis. The IRS will analyze the circumstances of your situation along with the facts regarding your case. 

If they determine that you acted with reasonable care while filing your taxes and were unable to file or pay in time due to unforeseen circumstances, then you’ll likely qualify for relief. Here are a few types of situations that would be considered unforeseen circumstances:

• Natural disasters
• Fires
• Deaths
• Unavoidable absence of the taxpayer
• An inability to get records
• Civil disturbances

Unfortunately, not having enough money to pay off your tax bill won’t qualify as “reasonable cause” to discharge your penalty. You also won’t be eligible for this type of relief if your reason for non-payment includes making an honest mistake, not understanding the tax laws or rules, or relying on a tax professional. Note that if you set up a payment plan online, you should also call the IRS to ask for penalty abatement. Forgetting to ask for penalty relief is a common mistake taxpayers make with online payment agreements.

What Happens if You Ignore a Failure to Pay Penalty?

If you fail to respond to a notification about a failure-to-pay penalty, then not only will the penalty get levied against you, but you might be liable for even more taxes, penalties, or interest in the future. It’s important to consider your options and respond to the penalty notification. If you’re unsure how to respond, then it might be a good idea to schedule a consultation with a tax expert.

Failure to Pay: Will Interest Build Over Time?

Another consequence of not paying your tax debt is that interest will accumulate on the penalties if you don’t pay them promptly. Interest will continue to increase the overall tax debt you owe until you’ve paid off the bill in full.

You can make a payment directly from your bank account, a debit card, a credit card, or a digital wallet directly from the IRS website. Before you do so, however, you will need to create an IRS online account if you don’t have one already. Once you create an account, you can sign in to make a tax payment at any time. You can also schedule estimated payments using the IRS’s online payment system. Note that if you’re required to make estimated quarterly payments and you don’t, the IRS will assess a penalty on your account. Or, if you prefer, you can pay with a check or money order by sending it to the IRS via mail.

Are You Struggling with Tax Penalties and Other Tax Problems?

A failure-to-pay tax penalty is meant to encourage taxpayers to pay their tax bills in full when they’re due. It’s also meant to financially penalize individuals that intentionally and willfully attempt to avoid paying their fair share of taxes.

The failure-to pay fee can also cause a lot of unintended harm, though, especially for taxpayers who want to pay off their tax debt but have found themselves in a tricky financial situation. If you’re struggling to pay off your taxes, then it’s crucial to understand your options.

Ignoring the problem will only make it worse. Instead, consider consulting with a tax expert who can help you better understand your tax situation, legal options, and more. Here at W Tax Group, our tax attorneys can help you determine whether it’s possible to have your fees reduced or even eliminated. 

We’ll also help you come up with a solid strategy to help you either pay off your tax debt in full at once or come up with a reasonable payment plan that the IRS is also willing to accept. If you’re ready to deal with your unpaid tax situation once and for all, then we can help. Contact us today to get started on your brighter future.