IRS Failure to Pay Penalty

If you miss the deadline to pay your tax bill in full, the IRS will charge your tax account with a failure-to-pay penalty (FTP). Being notified about this can be stressful, to say the least, but ignoring it is never a good idea, no matter how busy or scared you are.

Understanding how IRS penalties work can help you feel better positioned to handle the situation. And even if you know you can’t afford to pay your tax debt in full, you’ve still got options to improve things and avoid escalation.

What is the IRS Failure to Pay Penalty?

The failure-to-pay penalty is a fine imposed by the IRS on taxpayers who fail to pay their taxes owed by the due date. Along with the failure-to-file penalty, it is one of the most commonly charged penalties issued by the IRS.

If a failure-to-pay penalty applies to your account, the IRS will send you a formal letter detailing your tax assessment and the total amount owed, including penalties.

How Much is the IRS Failure to Pay Penalty?

This FTP penalty is charged as a percentage of the total unpaid tax bill. The exact amount you’ll be charged if you have to pay this penalty depends on your initial assessment as well as how long it has been past due.

This penalty is calculated based on how long your taxes remain unpaid. The IRS defines unpaid tax as the total tax shown as due on your tax return, minus any applicable withholdings or refundable credits. The FTP penalty ranges from 0.25% to 1% of your unpaid tax bill for each month, or part of a month, that remains unpaid. 

The typical rate charged is 0.5%, but you could be charged more or less depending on your situation. If the IRS were to issue a Notice of Intent to Levy, the FTP rate would increase to 1% after 10 days passes without payment or response. However, if you enter into an Installment Agreement with the IRS, the penalty for failing to pay would be reduced to the minimum of 0.25% per month.

As an example, let’s say your overdue tax bill is $2,000. A 0.5% FTP penalty would be $10 per month or for part of a month that your bill remains unpaid. This means that the IRS will charge a full month’s penalty even if you pay your tax in full before the month ends. 

In all cases, the total FTP penalty will never exceed 25% of your total unpaid balance.

Failure to Pay Penalty vs the Failure to File Penalty

As we’ve seen, the IRS failure-to-pay penalty is charged whenever a taxpayer misses the due date to pay their tax bill. This penalty applies to both filed and unfiled tax assessments. However, there is also a failure-to-file (FTF) penalty, which can often be applied in conjunction with a FTP penalty. 

The FTF penalty is calculated at 5% of the total overdue tax bill per month or part of a month that it remains unpaid, which is a lot higher than the typical 0.5% penalty for FTP. However, it’s important to note that the IRS will reduce the failure-to-file penalty to 4.5% in any month where the failure-to-pay penalty also applies. When these two penalties occur in a given month, the combined percentage of both penalties is capped at 5% in most cases.

Interest is also charged on these penalties. Typically, the IRS will charge interest at the current Federal short-term rate plus 3%. Rates for underpayment for the 2nd Quarter of 2024 are at 8%, but the date from which interest accrues on a penalty depends on the type of penalty in question.

Generally speaking, the IRS will charge interest from the due date of the amount you owe, increasing until the balance is paid. For failure-to-file penalties, the due date is the same as the return due date, or the extended return due date if you’ve filed an extension of time.

For the failure-to-pay penalty, the due date from which interest will begin to accrue is the date you are sent a notice or assessed the penalty.

How to Remove the IRS Failure to Pay Penalty?

In addition to simply paying your balance in full, or negotiating an alternative payment plan such as an Installment Agreement, there are other options for handling penalties from the IRS. You could potentially remove, reduce, or even dispute a penalty depending on your circumstances.

The IRS states that a penalty could be removed or reduced if you can show reasonable cause for your failure to meet your tax obligations. Reasonable cause means that a serious problem (death, illness, disaster, etc) prevented you from paying your tax bill.

A penalty may also be disputed if you believe you have sufficient reason to do so. For example, you believe the IRS applied the penalty in error or calculated it incorrectly.

Finally, you may qualify for the IRS’s penalty abatement offer. Taxpayers who have a good history of tax payment can qualify for a first-time penalty abatement. You may even apply for a first-time abatement without having paid your tax bill in full. However, in this case, you will get forgiveness on the existing penalties, but then, the FTP penalty will still be added to your account as explained above until the total balance is paid off.

Alternative IRS Payment Options

If you can’t find a way to pay your IRS bill in full, there are alternative options to pursue. You could, for example, try to work out a payment arrangement in order to avoid escalation and enforced collection actions. The IRS offers several types of payment arrangements including Installment Agreements. You might also consider applying for hardship status, or an Offer-in-Compromise which lets you pay off your taxes for less than owed. 

However your situation looks, it can be extremely beneficial to work with a licensed tax professional if you’re dealing with IRS penalties and overdue taxes. This can help you get clear on where you stand with the IRS, and how best to proceed in order to settle your tax debt efficiently.

FAQ

What is the IRS failure-to-pay penalty?

The IRS failure-to-pay penalty is an additional charge on top of your tax bill, usually of 0.5% of your total unpaid tax, that applies to any overdue tax payment.

What if I can’t pay my failure-to-pay penalty in full?

If you can’t pay your penalty and tax assessment in full, the IRS may have options to help you pay off your debt. This can include installment agreements, offer-in-compromise, and hardship status.

Can I get an extension to avoid a failure-to-pay penalty?

While you can easily get an extension to file your return, that does not extend your payment due date. Thus, requesting an extension does not help you avoid the failure-to-pay penalty, but it does help you avoid the failure-to-pay penalty, which is much higher. 

How do I know if I’ve been charged with a penalty by the IRS?

The IRS will notify taxpayers if they have been charged with a penalty. You should have received a notice or letter from the IRS regarding your overdue tax bill, and the applicable penalties and interest. You could also check your IRS online account for any penalties or charges, as well as contact the IRS directly by phone or mail.

Get Help With Tax Penalties

Worried about tax penalties? Are you behind on your tax payments and watching the penalties build up on your account? Then, it’s time to get help. At Damien’s Law, we can help you catch up on unfiled returns, request payment arrangements with the IRS, file claims for penalty relief, and more. When you contact us, we help you find a sustainable solution to your tax problems.