An Overview of IRS Delinquency Penalties

Three primary penalties apply when a taxpayer does not:

  1. File a return by the due date (Code Sec. 6651(a)(1));
  2. Pay the tax reported on the return by the due date (Code Sec. 6651(a)(2));
  3. Pay tax assessed by notice and demand by the IRS (Code Sec. 6651(a)(3)).

These apply to income, gift, and estate tax returns, among others.

Penalty for Failure to File a Return

  • Standard Penalty: 5% of unpaid tax per month (or part of a month), up to 25%.
  • Minimum Penalty (after 60 days late):
    • For 2020–2022: $435, or the tax due, whichever is smaller.
    • For 2023: $450.
  • Fraudulent Non-Filing: 15% per month, up to 75%.
  • Abatement: Allowed for reasonable cause and no willful neglect. File Form 843 or a detailed letter.

Case Insight:
Estate of Skeba—a penalty was abated despite a late filing because the estate had reasonable cause and no balance due by the extended deadline.

Penalty for Failure to Pay Tax Shown on Return

  • Standard Penalty: 0.5% of unpaid monthly tax (up to 25%).
  • Reduced to 0.25% while an installment agreement is in effect.
  • Increased to 1.0% if a levy is issued or a jeopardy assessment applies.
  • Abatement: Generally, it is only after full tax is paid, but it may still apply earlier with valid reasonable cause.

Penalty for Failure to Pay After IRS Demand

  • Triggered when payment is not made:
    • Within 21 calendar days of IRS demand (or 10 business days if $100,000+).
  • Penalty: 0.5% per month, up to 25%.
  • Abatement: Also based on reasonable cause.

Reasonable Cause and Willful Neglect

  • Reasonable Cause: Requires the taxpayer to show ordinary business care and prudence but inability to comply.
  • Willful Neglect: Involves intentional disregard or reckless indifference.
  • Supporting case law includes:
    • U.S. v. Boyle – Ignorance of legal requirements is not enough.
    • Cheek v. U.S. – The IRS must disprove a genuine good-faith misunderstanding of the law.

Factors for Relief:

  • Serious illness
  • Natural disasters
  • Reliance on a professional when the taxpayer was incapacitated
  • Inadequate internal controls (Xibitmax LLC case shows no relief when failure is within control)

Penalty Relief Options

1. First Time Abatement (FTA)

  • May be granted if:
    • No penalties in the prior 3 years
    • All returns are filed
    • Any tax due is paid or resolved

2. Special Relief Notices

  • Notice 2015-30:
    Relief from penalties related to incorrect/delayed Forms 1095-A.
  • Notice 2015-9:
    2014 relief for excess advance premium tax credit recipients. Requirements:

    • Filed timely
    • Tax due relates to the excess APTC
    • Filing/payment compliance otherwise met
  • Notice 2013-24:
    2012 transitional relief for delayed IRS form availability due to ATRA. Applies to returns with forms like 8863, 4562, 3800, 6765, etc.

Interplay of Penalties

  • If both failure-to-file and failure-to-pay penalties apply:
    • The amount of the failure-to-pay penalty reduces the failure-to-file penalty for the same period (Code Sec. 6651(c)).

Administrative Notes

  • Requests from third parties (even without a POA) must be acknowledged and communicated to the taxpayer.
  • For abatement, use Form 843 or a detailed written request, directed either to the IRS Service Center or the address on the IRS notice.