A penalty is imposed for a failure to file any individual tax return within the time prescribed, including extensions, unless the failure is due to reasonable cause and not willful neglect. The penalty is five percent of the unpaid tax required to be shown on the return for one month and an additional five percent for each month or part of a month that the failure continues, up to 25 percent. Obviously, this penalty can be quite severe.
If an income tax return is not filed within 60 days of the prescribed due date, including extensions, the minimum penalty is the lesser of 100 percent of the tax required to be shown on the return or $330 for returns required to be filed in 2020.
The late-filing penalty runs for the period up to the date the IRS receives the late return. The penalty is computed only on the net amount of tax due on the return after application of credits for payments of tax through withholding and estimated tax and any other credits claimed on the return.
The failure-to-file penalty is not imposed if the taxpayer can show that the failure was due to reasonable cause and not willful neglect. Reasonable cause is if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. Qualifying excuses may include death or serious illness in the immediate family, postal irregularities, or bad advice (you needn’t file) given to you by your tax advisor or the IRS itself.
In assessing ordinary business care and prudence, the IRS will examine the taxpayer’s reason for failure to comply, whether the taxpayer has a history of complying with the tax law, the length of time between the event and the cited reason for failure to comply, and whether the circumstances were beyond the taxpayer’s control.
Caution: This explanation is general in nature and should not be used for specific planning. Contact a tax professional for your specific planning needs.