How to avoid penalties for missing the tax deadline
If this year’s tax deadline has come and gone without a taxpayer filing a return, now is not the time to panic. Panicking will only make things worse, when in fact many taxpayers will not owe a penalty for filing a late return. For those who get a refund, there is no penalty for filing late. Most taxpayers get a refund, so the only downside for them is letting the IRS hold onto their money longer than necessary.
However, failure-to-pay and failure-to-file penalties and interest will hit taxpayers who owe the IRS and have not filed a return or an extension. But the good news is even these taxpayers may be able to avoid those penalties, which can quickly add up to 25 percent to their tax liability.
Penalty waiver for first-time procrastinators
First-time penalty abatement has been around since 2001. It allows taxpayers to ask the IRS to remove their penalties if the taxpayers typically comply with their tax responsibilities and have not faced certain penalties within the past three years. The government estimated in 2010 that 1.2 million taxpayers could have used the first-time penalty abatement waiver, saving them more than $181 million.
The most complex part of first-time penalty abatement is determining whether the taxpayer qualifies. Only certain penalties and certain returns are eligible, and the taxpayer must meet the IRS’s clean compliance criteria. Individual taxpayers may be able to have penalties waived if they:
- face failure-to-file and/or failure-to-pay penalties on their individual tax return,
- do not have failure-to-file or failure-to-pay penalties in the previous three years on their individual tax return and
- filed all required tax returns for the past three years.
For example, taxpayers who missed the April 18 deadline (without any extensions) and owed $2,500 on their federal return would face failure-to-file and failure-to-pay penalties. If they filed their return two months late, those penalties would reach $250, on top of their $2,500 federal tax liability. If they filed their return a year late, these penalties would add $775 to their tax bill. If the taxpayers qualified for first-time abatement, the entire $775 in penalties would be eliminated. (The taxpayers would still owe interest on the unpaid taxes.)
Other penalty waivers available for repeat procrastinators
Taxpayers who are granted the first-time abatement waiver won’t be eligible for it again for the next three years. However, taxpayers may be eligible for other types of IRS penalty abatement.
Reasonable cause penalty abatement
If taxpayers take care to meet their filing and payment deadlines but face an obstacle, the IRS could waive penalties for reasonable cause. Reasonable cause includes obstacles like disaster, death or serious illness. The taxpayer will need to document their facts and circumstances to establish their claim of reasonable cause.
Statutory exception and administrative waiver
Taxpayers who received incorrect advice from the IRS and face penalties for acting on that advice may qualify for a statutory exception or administrative waiver.
Taxpayers can request first-time abatement by phone or in writing, but if they face a larger penalty, they should submit their request in writing. If taxpayers need help understanding the eligibility requirements or how to work with the IRS to request the waiver, their local tax expert can help them navigate the process and potentially save them IRS penalties.
While there are options available to some taxpayers to avoid penalties even after missing the tax deadline, it is still important to file a return as soon as possible to minimize penalties and interest. Taxpayers can start their taxes online or by visiting one of H&R Block’s year-round tax offices.
By Annelise Wiens
As the newsroom editor, Annelise Wiens is interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Missouri. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.