Common IRS Tax Penalties

1. Late tax returns (failure to file)
2. Late tax payments (failure to pay)
3. Tax filings with inaccuracies

Each of these IRS tax penalties will be described below with an example given so you can better understand the impact of the penalty. In the calculations below, interest wasn't included for the sake of simplicity. However, you will have to pay compounded daily interest which is charged on any unpaid tax from the payment deadline until you pay your taxes on these IRS tax penalties.

Late Tax Returns (Failure to File)

Late tax returns incur a tax penalty based on your tax balance and the time difference between the last day you could file without a penalty and the date you actually filed your late tax return. The IRS tax penalty you must pay is 5% for each month your tax return is late, up to a maximum 25% penalty (5 months). So if you owe $10,000 in taxes and are 3 months late in filing your late tax return, you would then have to pay $10,000 + ($10,000*15%) for a total of $11,500.

Late Tax Returns Due to Fraud

If you are found to have filed your taxes late with the IRS due to fraud, the IRS tax penalty is much steeper. The penalty you must pay is 15% for each month your tax return is late, up to a maximum 75% penalty (5 months). So if you owe $10,000 in taxes and are 3 months late in filing your late tax return as a result of fraud, you would then have to pay $10,000 + ($10,000*45%) for a total of $14,500. As you can see, late tax returns as a result of fraud incur one of the steepest IRS tax penalties.

Late Tax Payments ( Failure to Pay)

Late payments incur a tax penalty based on the amount of tax you owe and the time difference between the payment deadline and the date you actually pay your taxes. The IRS tax penalty you must pay is 0.5% for each month your tax is not fully paid, up to a maximum 25% penalty (50 months). So if you pay a portion of your taxes but still have $2,000 owed and it's been a month since the April 15th payment deadline, you will owe $2,000 + ($2,000*0.5%) for a total of $2,010. Filing your taxes and delaying on your payment is a better option than not filing your taxes and delaying on your payment.

Tax Filings with Inaccuracies

Filing with inaccuracies incurs IRS tax penalties based on your infraction. Below is a list of common infractions and their associated penalties.

Inaccuracies due to Frivolous Return

If the IRS deems your income tax return “frivolous”, they can assess a $500 penalty in addition to the other IRS tax penalties you may incur. A “frivolous” tax return is one based on “deliberate defiance of the tax laws.”

Inaccuracies due to Disregard for IRS Tax Rules

If you show negligence or disregard for IRS tax rules, you may incur a tax penalty of 20% of tax underpayment due.

Inaccuracies due to Substantial Understatement of Income Tax

If you substantially understate your income tax (10%+ underpayment of actual tax due or $5,000+), you may incur a tax penalty of 20% of tax underpayment due.

Inaccuracies due to Not Including Your Identification Number

If you don't comply by including your correct identification numbers, you may incur a $50 penalty.

Disputing IRS Tax Penalties

If you're assessed an IRS tax penalty, you can appeal given that you have established authority supporting your position and you submit a Penalty Abatement Request. Penalty abatement is a term that refers to your right to dispute IRS tax penalties. While the appeal is in the queue, your payment of the tax penalty is suspended.