An Overview of the Failure to File Penalty
Tax professionals can help clients mitigate its financial damage
Now that April 15, 2024 has passed, any Form 1040 or Form 1120 not filed or properly extended is subject to the §6651(a)(1) failure to file penalty. Having worked in tax controversy most of my career, I have seen firsthand the financial damage this penalty can create. A tax return filed just one day late could have thousands of dollars in late filing penalties asserted.
The §6651(a)(1) failure to file penalty is 5% of the amount required to be shown on the tax return per month or fraction of a month that the return is late, with a 25% maximum. If the §6651(a)(2) failure to pay penalty accrues during the same month as the failure to file penalty, then the failure to file penalty is reduced by that amount.
§6651(f) increases the failure to file penalty to 15% per month or fraction of a month, with a 75% maximum, if the failure to file a tax return is fraudulent.
Starting Date
According to Internal Revenue Manual 20.1.2.3.7.1(1) (04-19-2011), the failure to file penalty begins on the date following the later of:
The normal return due date,
The extended return due date in the case of an approved extension,
The postponed due date under §7508A, or
The combat zone postponed due date under §7508.
An individual taxpayer who did not file an extension but failed to file a return by April 15, 2024, is subject to the failure to file penalty starting April 16, 2024.
An individual taxpayer who filed an accepted extension and now has a due date of October 15, 2024, but fails to file a return by that date is subject to the failure to file penalty starting October 16, 2024, assuming the IRS did not terminate the extension.
Month Defined
According to Treas. Reg. §301.6651-1(b)(2) and IRM 20.1.2.3.7.1(2) (04-19-2011), a month ends on the day of the month corresponding with the day of the month of the latest return due date, and each new month begins the next day.
An individual taxpayer who did not file an extension but failed to file a return by April 15, 2024 is subject to a 5% failure to file penalty if the return is filed on or before May 15, 2024. On May 16, 2024, the failure to file penalty increases to 10%.
An individual taxpayer who filed an accepted extension and now has a due date of October 15, 2024, but fails to file a return by that date is subject to a 5% failure to file penalty if the return is filed on or before November 15, 2024. On November 16, 2024, the failure to file penalty increases to 10%.
Penalty Base
The failure to file a penalty is imposed on the amount of tax required to be shown on the return, which §6651(b)(1) reduces by the amount paid on or before the payment due date, along with any credits claimed on the tax return.
IRM 20.1.2.3.7.3(1) (04-19-2011) explicitly states that the amount subject to the failure to file penalty is not reduced by payments made after the payment due date unless the payment due date is postponed under §7508 or §7508A. This is consistent with Treas. Reg. §301.6651-1(d), which states that payments after the payment due date only reduce the §6651(a)(2) failure to pay penalty base.
Even if the late-filed return initially showed a refund, any later assessment of tax that causes an amount of tax required to be shown on the return will be subject to the failure to file penalty. It is negligent to neglect filing an extension for a tax return simply because the return shows a refund owed to the taxpayer.
Minimum Penalty
If an income tax return is more than 60 days late, the §6651(a)(1) flush language imposes a minimum failure to file penalty of the lesser of $485 (inflation-adjusted; this amount is for returns filed in 2024)) or 100% of the tax required to be shown on the return.
Because of the second prong of the minimum penalty calculation, a late-filed refund return will generally not be subject to a minimum failure to file penalty.
Example
An individual taxpayer shows a $20,000 balance due on their 2023 tax return, and they failed to file an extension. On April 16, 2024, the taxpayer fully paid the $20,000 balance due, but they filed the return late on June 17, 2024.
The taxpayer is subject to a 15% failure to file penalty (for the three months April 15 to May 15, May 16 to June 15, June 16 to July 15) on the $20,000, or $3,000. The $3,000 amount will be reduced by $100 and total $2,900; the $100 reduction is the 0.5% §6651(a)(2) failure to pay penalty for April 16 to May 15 on the $20,000 balance that was paid late (albeit only one day late).
Penalty Relief
The IRS has a generous First Time Abate (FTA) policy, and the §6651(a)(1) failure to file penalty, along with the §6652(a)(2) failure to pay penalty, are eligible for FTA. FTA is an administrative waiver and not part of the Internal Revenue Code or Treasury Regulations, and its requirements are outlined in IRM 20.1.1.3.3.2.1 (03-29-2023).
A taxpayer can get the failure to file penalty abated under Treas. Reg. §301.6651-1(c)(1) if they can demonstrate reasonable cause by showing that they exercised ordinary business care and prudence but were still unable to comply with their filing obligation.
In U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court held a taxpayer cannot delegate their duty to timely file a tax return or extension to a representative or agent, and later court decisions have strictly interpreted that holding concerning tax professionals. However, if a taxpayer can demonstrate the failure to file the return was due to reliance on the advice of the tax professional with respect to a tax return filing requirement, it may be possible for the taxpayer to establish reasonable cause.
Neonatology Associates v. Comm., 115 T.C. 5 (2000) provides a three-prong test to determine if reliance on a tax professional’s advice constitutes reasonable cause:
The advisor was competent, with sufficient expertise to justify reliance,
The taxpayer provided necessary and accurate information to the advisor, and
The taxpayer relied in good faith on the advisor’s judgment.
It is important to note that under IRM 20.1.1.3.3.2.1(12), penalty relief under FTA will be considered and applied before reasonable cause. If FTA criteria are met, the FTA waiver will be applied, and relief will not be based on reasonable cause.
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This is great Tom.
Two questions:
1. For corp/partnership returns with no business activity (i.e. no tax due), can they be filed penalty free even if they’re a few years overdue?
2. If a return is filed on time, but gets rejected, does the IRS provide a few additional days for filing without penalty?
A client of mine submitted a $1 extension payment through the IRS’ website on 16 April 2024. I’ve seen chatter from other pros that extensions filed via professional software in the days following the initial deadline are sometimes accepted by the IRS. What is the best way to verify whether a client’s extension has been accepted?