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Penalties for not filing or filing late tax return

Jim Buttonow, CPA, CITP

SVP Post-Filing Tax Services

Published on: June 06, 2023

Taxpayers who file a late tax return and have a balance due can face significant monetary penalties. Taxpayers who wilfully fail to file can also face criminal sanctions.

  • Failure to file penalty (5% per month, maximum of 25%).
  • Failure to pay penalty (0.5% per month, maximum of 25%); when combined with the failure to file penalty, the two penalties can reach a maximum of 47.5%.
  • Civil fraudulent failure to file penalties (triple the normal failure to file penalty — increasing the maximum penalty to 75% from).

Taxpayers who wilfully fail to file can also face criminal sanctions. Criminal failure to file cases usually involves taxpayers who are also trying to evade payment of taxes. The taxpayers most likely to encounter IRS criminal investigations for non-filing are higher-income non-filers, those trying to hide income and assets, and those with repeat history of non-filing.

But all taxpayers should take back tax returns seriously and quickly work to get back into filing compliance.

Failure to file penalty relief for 2019 and 2020 returns

In 2022, the IRS announced failure to file penalty relief for 2019 and 2020 tax year returns, filed before Sept. 30, 2022. For Form 1040 filers and many business and specialty filers, the IRS automatically abated the failure to file penalty. Taxpayers can also receive partial failure to file penalty relief for returns filed after the Sept. 30, 2022, deadline, because the failure to file penalty for those returns started to accrue on Oct. 1, 2022. [IRS Notice 2022-36 and IR-2022-163

If that provision applies to you, you or your Tax Pro can confirm that your failure to file penalty was abated by looking at your 2019 and/or 2020 account transcripts.

How to request penalty relief

Taxpayers can ask the IRS not to assert the penalty when they are filing their return, or they can request penalty abatement after they’ve filed the return.

  • Nonassertion: Make a nonassertion request by attaching a letter to your return that explains why the IRS should grant relief. Practically, the IRS ignores most non-assertion requests while processing late-filed returns, and requires taxpayers to follow up with a post-assessment abatement request. The IRS considers most nonassertion requests when a local examination or collection employee is assigned to the case.
  • Abatement: If the IRS has already assessed late-filing penalties, you can request abatement with a letter or Form 843, Claim for Refund and Request for Abatement. You don’t have to pay the taxes before penalties can be abated, but interest will continue to accrue. However, if the failure to pay penalty hasn’t yet accrued to its maximum amount and you haven’t paid the tax, you may want to wait to request abatement until the full penalty has been assessed. The failure to pay penalty will continue to be assessed until it reaches its maximum amount, even if the prior penalties were abated.

Taxpayers mostly use two types of abatement requests

Taxpayers usually request abatement using the IRS first-time penalty abatement waiver (FTA) or reasonable cause.

  • FTA: Taxpayers can first use the FTA waiver if they have a clean compliance history. That means no penalties (failure to file, failure to pay, or accuracy penalty) in the previous three years. If that’s the case, you would qualify for automatic removal of the failure to file and pay penalties for one year only. The IRS usually grants FTA after assessing the penalty. Taxpayers requesting FTA can do so for any amount by phone.
  • Reasonable cause: When taxpayers use reasonable cause arguments to request penalty abatement, the IRS will look to see whether the taxpayer experienced circumstances outside of their control that caused them to file late. Below are the reasonable cause categories and the issues that you should address when requesting reasonable cause for the failure to file penalty.


Reasonable cause arguments for failure to file and failure to pay penalties

There are many potential reasonable cause arguments taxpayers can use to remove late filing and payment penalties. The IRS highlights these more common categories, and what issues/questions they will address is declaring that the taxpayer has reasonable cause under that category:

Category Category Issues/Possible IRS Questions
Absence: Taxpayer claims he or she couldn’t comply because of absence, either his or her own or the absence of another person.
  • Who was absent?
  • Date(s) of the absence
  • Reason for absence
  • How did the absence prevent the taxpayer from filing on time?
  • Is documentation provided?
Assessment error: The penalty shouldn’t have been assessed in the first place, or the taxpayer disagrees with the amount of the penalty.
  • What type of assessment error?
  • In what way does the taxpayer disagree with the penalty computation?
  • Was a payment missing?
  • Was a payment refunded in error?
  • Was the taxpayer not given credit for an extension?
  • Did the taxpayer mail the return by the deadline?
Bankruptcy: The taxpayer claims to be in bankruptcy. What documentation is provided to confirm the bankruptcy?
Casualty: The taxpayer claims he or she was unable to comply because of a casualty.
  • Date(s) of casualty
  • Type of casualty, such as:
    • Fire
    • Theft
    • Accident
  • In a FEMA-declared area?
  • What was destroyed?
  • Is documentation provided?
Death: The taxpayer, a relative, or someone affecting the taxpayer's business died.
  • Date of death?
  • Who died?
  • Is documentation provided?
Divorce: A divorce prevented the taxpayer from complying.
  • Who got divorced?
  • How did the divorce prevent the taxpayer from meeting her obligation?
Elderly taxpayer: The taxpayer didn’t comply because he or she is elderly or incapacitated.
  • Has someone taken responsibility for the affairs of the taxpayer?
  • A legal guardian appointed?
  • A child or relative?
  • Is there documentation?
Extension: Any problems associated with an extension.
  • Taxpayer forgot to file an extension?
  • Extension and/or payment lost in mail?
  • Third party did not file extension?
Ignorance: The taxpayer did not know about, or was unfamiliar with, filing requirements, withholding, etc.; the taxpayer was unaware of income or did not know it was taxable.

Taxpayer claims ignorance in the following areas:

  • Did not understand filing requirements?
  • First time under-withholding of tax?
  • First time self-employment?
  • First time unanticipated income?
  • Believed too little income to file?
  • Didn't know the due date?
  • Not aware of income?
  • Not aware income taxable?
  • Involves a foreign language or custom?
Illness: An illness of the taxpayer or an illness of someone else caused the failure to comply.
  • Did illness stop the taxpayer from taking care of normal financial activities?
  • Who was ill?
Impairment: The taxpayer is physically or mentally impaired.
  • Has someone taken responsibility for the affairs of the taxpayer?
  • What is the extent of taxpayer's impairment?
IRS error: Taxpayer claims that an IRS error caused the non-compliance.
  • What was the nature of the IRS error?
  • Error in an IRS or SSA Publication?
  • IRS employee gave incorrect technical advice
  • IRS incorrectly processed taxpayer's return?
  • IRS incorrectly processed taxpayer's payment?
  • IRS failed to send promised forms?
  • What documentation is provided?
Lack of forms: The taxpayer did not have the form or schedule required to file the return. Did the taxpayer request an extension of time to file?
Mail problem: The taxpayer claims that return or payment was late due to a problem with the mail.
  • What was the nature of the mail problem?
  • Return/payment sent to another taxing agency?
  • Return/payment sent to another creditor?
  • Return/payment lost in mail?
  • Insufficient postage?
  • Delayed in mail; taxpayer claims error by postal service?
  • Sent timely to Lock Box?
Mitigating circumstance: A mitigating circumstance does not refer to an event beyond the control of the taxpayer, but it is an issue mentioned by the taxpayer. Identifying mitigating circumstances helps to produce a better penalty disallowance letter.
  • What kind of circumstance does the taxpayer describe?
  • Lack of wilful intent?
  • Taxpayer called IRS for advice, but phones were busy?
  • Filing requirements are too complex?
  • Taxpayer's situation is special or unique?
  • First-time taxpayer received unanticipated income, self-employment income, etc.?
  • Taxpayer changed jobs, moved, having marital difficulties?
  • Taxpayer took corrective action?
  • Taxpayer detected error in first place?
  • Taxpayer corrected the error?
  • What does the taxpayer claim?
  • When did the event preventing compliance begin and end?
  • What is the basis for the taxpayer's claim?
  • What impact did this have on the taxpayer
  • What documentation is provided?
Records unobtainable:
The taxpayer was unable to obtain or reconstruct records.
  • What type of records were unobtainable?
  • From whom was the taxpayer unable to obtain records?
  • Why was the taxpayer unable to obtain the records?
Reliance: The taxpayer relied on someone else to file or pay or relied on the advice of someone else.
  • Whom did the taxpayer rely on?
  • What was the nature of the reliance?
  • Did the person say the taxpayer did not need to file or pay?
  • Did the person handle everything?
  • Did the person fail to send in return or payment?
  • Did the person fail to file an extension?
  • What documentation is available?
Relocation: A move or relocation resulted in the taxpayer's inability to comply. A relocation will not meet reasonable cause penalty relief criteria. Therefore, no questions are asked in this category. The penalty will automatically be sustained.
Signature: One or more required signatures were missing from the taxpayer's return.
  • What is the nature of the signature problem?
  • Joint return unsigned by husband or wife?
  • Not signed, but otherwise complete?
  • Spouse unwilling to sign return or check?
Tax law change: The taxpayer's failure to comply was directly related to a change in the tax law.
  • Did the taxpayer cite a specific change in the tax law?
  • Would a return and/or payment have been due if no tax law change occurred?
  • When did the taxpayer become aware of the need to file or pay?
Unable to pay: The taxpayer lacked the funds to pay, or payment would have been a hardship.

The inability to pay does not constitute reasonable cause for late filing. However, it could be cause for late-payment penalty abatement. An undue hardship must be more than an inconvenience to the taxpayer. Each request must be considered on a case-by-case basis. The mere inability to pay does not ordinarily provide the basis for granting penalty relief. The taxpayer must show that he or she exercised ordinary business care and prudence in providing for the payment of the tax liability. Information to consider when evaluating a request for penalty relief includes, but is not limited to the following:

  • When did the taxpayer know she could not pay?
  • Why was the taxpayer unable to pay?
  • Did the taxpayer explore other means to secure the necessary funds?
  • What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
  • Did the taxpayer pay when the funds became available?

We're here for you

Need help with filing and/or asking for penalty abatement for a back tax return? Contact the experts at Jackson Hewitt. We will get to the bottom of your back tax returns and help you get back into filing compliance. At Jackson Hewitt, we have 40 years of expertise to help you manage your tax issues. Whether simple or complex, our team of licensed professionals are trained to work directly with the IRS, while keeping you updated every step of the way. Start for free today and learn about how we can help resolve your tax issues.

About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

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