Tax Penalties
IRS penalties are not suggestions. They are legally assessed charges that compound monthly, accrue interest daily, and can ultimately exceed the original tax liability they were attached to. The table below covers the most common federal tax penalties individuals and businesses face — including rates, maximum amounts, and the circumstances that trigger each one.
Two things are true about most IRS penalties. First, many of them are avoidable with proper planning and timely filing. Second, many of them are also removable — through first-time penalty abatement, reasonable cause relief, or other formal IRS processes — once they have been assessed. Knowing both sides of that equation is what separates a taxpayer who manages their IRS exposure from one who simply pays whatever they are billed.
If you have already been assessed a penalty and want to know your options, contact Parr & Ibarra CPA or jump to the FAQ section below.
| Penalty Type | Amount / Rate | Max / Notes |
|---|---|---|
| Failure to File Return | 5% of unpaid tax per month | Max 25%; Minimum $510 if >60 days late |
| Failure to Pay Tax | 0.5% per month (1% if after levy) | Max 25%; 0.25% if in installment agreement |
| Combined Failure to File & Pay | Up to 5% per month (4.5% file + 0.5% pay) | Max ~47.5% |
| Interest on Unpaid Tax | ~7% annually (compounded daily) | Based on federal short-term rate + 3% |
| Underpayment of Estimated Tax | Interest-based penalty | Avoid if 90% of current year tax or 100–110% of last year’s paid |
| Information Returns (W-2/1099) | $60–$340 per form | Intentional disregard: $680+ per form, no cap |
| Accuracy-Related Penalty | 20% of tax underpayment | 40% for gross misstatements |
| Civil Fraud Penalty | 75% of tax underpayment | Requires IRS proof of fraud |
| Frivolous Return Penalty | $5,000 | For knowingly false or invalid filings |
| Payroll Tax Deposit Late | 2–15% of unpaid taxes | Increases with lateness stages |
| Trust Fund Recovery Penalty (TFRP) | 100% of unpaid trust fund taxes | Personally liable |
| Fail to Furnish W-2/1099 to Payee | $310 per form | Separate from filing penalty |
| Fail to File 1065 / 1120S | $245 per owner per month (up to 12 months) | Up to $11,760+ for 4-person firm |
| Excess IRA/HSA Contributions | 6% of excess amount | Annual until corrected |
| Early Retirement Withdrawal | 10% of withdrawal | Before age 59½; exceptions apply |
| Fail to File FBAR (Foreign Bank Account) | $10,000 (non-willful); up to $100K+ or 50% of account (willful) | Criminal charges possible |
| Fail to File Form 8938 (FATCA) | $10,000 initial; $50,000 for continued failure | Additional tax penalties may apply |
| ACA Shared Responsibility (Employers) | $241.67–$362.50 per employee per month | IRC §4980H(a/b); ~ $2,900–$4,350/year |
| Excess Advance Premium Tax Credit | Repayment required | Based on income discrepancy |
| BOI Reporting Penalty (FinCEN 2025) | $591 per day; up to $10,000 + jail (2 years) | New in 2024/25; applies to business owners |
| Nonprofit Late Form 990 Filing | $20–$110 per day | Up to $56,000; 3-year lapse = auto revocation |
| Expatriation Tax | Tax on deemed sale of worldwide assets | Applies to covered expatriates |
| Tax Evasion (Criminal) | Up to $250,000 fine + 5 years prison | Requires willful intent |
| Willful Failure to File or Pay | Up to $100,000 fine + 1 year prison | Criminal offense |
| Aiding/Assisting Fraud | Up to 3–5 years in prison + fines | For preparers or others involved in fraud |
How to Read This Table
The rates shown are marginal and compounding
The failure-to-file penalty of 5% per month does not mean you pay 5% once. It means 5% is added each month the return remains unfiled, up to the 25% cap. If the failure-to-pay penalty is also accruing simultaneously, both stack — and interest compounds daily on top of both.
Interest accrues separately from penalties
The current IRS interest rate on underpaid taxes is approximately 7% annually, compounded daily. Interest runs from the original due date of the return, not from the date a penalty is assessed, and it applies to the unpaid tax and to any assessed penalties that remain unpaid.
The maximums are caps on the penalty rate, not the dollar amount
A 25% cap on the failure-to-file penalty means the penalty rate stops increasing at 25% of the unpaid tax. It does not mean the total penalty is capped at $25 or any fixed dollar amount. If you owe $100,000 and the penalty reaches its 25% cap, the penalty alone is $25,000 — before interest.
Criminal penalties require willful intent
The civil penalties shown in the table — failure to file, accuracy-related, civil fraud — are assessed administratively. Criminal penalties at the bottom of the table require a referral to the Department of Justice, a grand jury, and proof beyond a reasonable doubt that the taxpayer acted willfully. Criminal prosecution is uncommon relative to civil enforcement but is not hypothetical for cases involving significant fraud or deliberate evasion.
Understanding the Most Consequential Penalties
Failure to File vs. Failure to Pay — The Most Common Mistake
Most taxpayers who cannot afford their tax bill make the same error: they skip filing because they cannot pay. This is the most expensive mistake in the table. The failure-to-file penalty accrues at 5% per month — ten times the failure-to-pay rate of 0.5% per month. A taxpayer who files on time and cannot pay owes the 0.5% monthly penalty plus interest. A taxpayer who does not file at all owes 4.5% per month more — on top of the same failure-to-pay penalty and interest — for doing nothing.
The correct approach when you cannot pay is to file on time anyway, pay as much as you can with the return, and address the remaining balance through an installment agreement or other resolution. Filing an extension before the deadline eliminates the failure-to-file penalty entirely for the extension period — but only if an accurate estimate of tax owed is paid with the extension request. An extension to file is not an extension to pay.
Payroll Penalties — The Fastest Way to Personal Liability
For business owners, payroll tax penalties carry a risk that individual income tax penalties do not: personal liability. Employee payroll taxes — Social Security, Medicare, and federal income tax withheld from employee paychecks — are held in trust by the employer until remitted to the IRS. The IRS treats these funds as belonging to employees, not the business, from the moment they are withheld.
When a business fails to remit payroll taxes, the IRS can assess the Trust Fund Recovery Penalty against any individual deemed a "responsible party" — typically the business owner, officer, or anyone with check-signing authority. The TFRP is 100% of the unpaid trust fund taxes assessed personally against that individual. If the business owes $80,000 in trust fund taxes, each responsible person can be assessed $80,000 individually — even after the business is closed. This is not a theoretical risk. It is one of the most aggressively enforced collection tools in the IRS's arsenal.
The deposit penalty schedule that precedes TFRP enforcement begins at 2% for deposits one to five days late and escalates to 15% for deposits more than ten days after the first IRS notice. Businesses that fall behind on payroll deposits need professional intervention before the liability compounds further.
Information Return Penalties — Overlooked by Small Businesses
The W-2 and 1099 penalty structure is frequently underestimated by small business owners. Each form that is late, incorrect, or not furnished to the payee is a separate violation with its own penalty. For a business with 20 contractors that files 1099s late, the penalty is $60 to $340 per form — up to $6,800 before any intentional disregard finding. If the IRS determines the failure was intentional, the minimum penalty jumps to $680 per form with no cap.
For partnerships and S corporations, the failure-to-file penalty is assessed per owner per month — up to 12 months. A four-partner firm with a late Form 1065 can face up to $11,760 in penalties before the partnership owes a dollar of additional tax.
FBAR and FATCA — The International Penalties Most Advisors Miss
Taxpayers with foreign bank accounts exceeding $10,000 at any point during the calendar year are required to file an FBAR (FinCEN Form 114). This is a separate obligation from the tax return — it is not filed with the IRS but with FinCEN, and it has its own penalty structure entirely. The non-willful penalty for failing to file is $10,000 per violation. Courts have split on whether that means $10,000 per year or $10,000 per account per year, but either way the exposure accumulates quickly for multi-year failures.
The willful FBAR penalty is the larger of $100,000 or 50% of the account balance per violation — and it can be assessed for multiple years simultaneously. Criminal prosecution is also possible for willful failures. DFW residents with foreign financial accounts, foreign business interests, or income from foreign sources should confirm their FBAR and FATCA compliance is current.
BOI Reporting — The Newest Penalty on the List
The Beneficial Ownership Information reporting requirement under the Corporate Transparency Act is one of the most recent additions to the federal compliance landscape. Business owners who have not filed their BOI report with FinCEN face a daily civil penalty of $591, up to $10,000 total, plus potential criminal penalties of up to two years in prison for willful violations. This requirement applies to most small business entities and has caught many owners off guard because it is not filed with the IRS or any tax authority — it is a FinCEN obligation that most traditional tax preparers may not have flagged proactively.
Penalties That Can Be Removed After Assessment
The IRS assessing a penalty is not the end of the conversation. Several formal mechanisms exist for reducing or eliminating assessed penalties, and taxpayers who do not request relief leave money on the table.
First-Time Penalty Abatement The IRS’s first-time abatement policy is available to taxpayers who have no penalties on their account for the three prior tax years, have filed all required returns, and have paid or arranged to pay any remaining balance. It applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties. It is not means-tested and does not require documenting extraordinary circumstances. For a taxpayer who receives their first late-filing penalty after years of clean compliance, first-time abatement is often granted on a single phone call — but only if it is requested. The IRS does not apply it automatically.
Reasonable Cause Abatement When a taxpayer can demonstrate that they exercised ordinary business care and prudence but were still unable to comply due to circumstances beyond their control, the IRS may abate the penalty for reasonable cause. Acceptable grounds include serious illness or incapacitation of the taxpayer or an immediate family member, unavoidable absence, destruction of records by fire or natural disaster, reliance on incorrect advice from a qualified tax professional, or other circumstances that made compliance genuinely impossible. The documentation standard matters — a vague reference to being busy or having personal problems does not satisfy the reasonable cause standard. A well-documented written request that ties the specific circumstances to the specific compliance failure is far more likely to succeed.
Statutory Exceptions For estimated tax penalties and certain other penalties, statutory exceptions exist that eliminate the penalty without requiring an abatement request. Paying 100% of the prior year’s tax liability (110% if prior-year AGI exceeded $150,000) through withholding or estimated payments eliminates the underpayment penalty entirely regardless of what is owed for the current year. Understanding which safe harbors apply before the tax year ends prevents penalties that cannot be abated after the fact.
Received an IRS Penalty Notice? Here Is What to Do First.
The most common mistake after receiving an IRS penalty notice is either ignoring it or paying it without evaluating whether it is correct and whether it can be reduced. Every IRS notice has a deadline — some as short as 30 days — and missing that deadline closes options that would otherwise be available.
Parr & Ibarra CPA works with individuals and business owners throughout Hurst, Keller, Grapevine, Addison, and the broader DFW area on IRS penalty response, penalty abatement requests, and the resolution of underlying tax liabilities that generated the penalties. Adan Ibarra is a licensed CPA with Circular 230 representation authority and legal education — he communicates directly with the IRS on your behalf and evaluates every available option before recommending a path forward.
If you have received a notice, do not wait. Schedule a consultation or call 817-562-5375.
Relevant services: Tax Controversy & IRS Representation | Tax Resolution | Tax Preparation | Payroll Services
Frequently Asked Questions
What is the penalty for filing taxes late?
The failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25% of the unpaid tax. If the return is more than 60 days late, a minimum penalty applies — $510 for 2026 or 100% of the unpaid tax, whichever is smaller. The failure-to-file penalty is ten times larger than the failure-to-pay penalty, which is why filing on time even without full payment is always the better outcome.
What is the penalty for not paying taxes on time?
The failure-to-pay penalty is 0.5% of the unpaid tax for each month or partial month the tax remains unpaid, up to a maximum of 25%. The rate drops to 0.25% per month while a taxpayer is in an approved installment agreement and increases to 1% per month if the IRS issues a notice of intent to levy. The failure-to-pay penalty accrues in addition to interest on the unpaid balance, which is currently approximately 7% annually compounded daily.
Can the IRS waive or remove a penalty?
Yes. The IRS can remove assessed penalties through first-time penalty abatement, reasonable cause abatement, or statutory exception. First-time penalty abatement is available to taxpayers with no prior penalties in the preceding three years who have filed all required returns. Reasonable cause abatement requires documenting specific circumstances beyond the taxpayer’s control that prevented compliance. Neither type of abatement is applied automatically — it must be formally requested, and a well-prepared request significantly improves the outcome.
What is the trust fund recovery penalty?
The trust fund recovery penalty allows the IRS to assess business owners, officers, and other responsible parties personally for 100% of unpaid payroll taxes that were withheld from employees but not remitted to the IRS. It is one of the most serious enforcement tools the IRS uses because it creates personal liability that survives the closure of the business. Any individual with authority over business finances and knowledge of the unpaid taxes — including bookkeepers with check-signing authority — can be assessed the penalty personally.
What happens if I cannot pay the IRS penalty?
Penalties and interest accrue on any unpaid balance until it is fully paid. If the underlying tax and penalties remain unpaid, the IRS will eventually file a federal tax lien and can pursue levy action — bank account freezes, wage garnishments, or seizure of property — without a court order. The correct response is not to wait but to engage the IRS proactively through an installment agreement, an offer in compromise, or a currently not collectible determination, depending on your financial situation. Resolving the underlying liability stops the accrual of further failure-to-pay penalties.
What is the penalty for not filing a 1099 or W-2?
The penalty for failing to file correct information returns — including 1099s and W-2s — with the IRS ranges from $60 to $340 per form depending on how late the form is filed. A separate penalty of up to $310 per form applies for failing to furnish a correct copy to the payee. If the IRS determines the failure was intentional, the penalty is at least $680 per form with no maximum cap. For businesses with multiple contractors or employees, these penalties can accumulate quickly and are assessed separately for the IRS filing and the payee copy.
What is the FBAR penalty and who owes it?
The FBAR — Report of Foreign Bank and Financial Accounts (FinCEN Form 114) — must be filed by any U.S. person who had a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year. The penalty for non-willful failure to file is $10,000 per violation. The penalty for willful failure is the greater of $100,000 or 50% of the account balance per violation, and criminal prosecution is also possible. FBAR is not filed with the IRS — it is filed electronically with FinCEN through the BSA E-Filing System and has its own separate deadline.
What is the penalty for missing an estimated tax payment?
The underpayment of estimated tax penalty is interest-based — calculated at the federal short-term rate plus 3%, currently approximately 7% annually, on the amount of the underpayment for the period it was underpaid. The penalty can be avoided by paying at least 90% of the current year’s tax liability or 100% of the prior year’s liability (110% if prior-year AGI exceeded $150,000) through withholding or quarterly estimated payments. The penalty is calculated on Form 2210 and can be annualized if income was uneven throughout the year, which can reduce or eliminate it for taxpayers whose income is seasonal or irregular.
What is the accuracy-related penalty?
The accuracy-related penalty is 20% of the portion of any tax underpayment that is attributable to negligence, disregard of rules, or a substantial understatement of income tax. A substantial understatement exists when the understated tax exceeds the greater of 10% of the correct tax or $5,000. The penalty increases to 40% for gross valuation misstatements. The accuracy-related penalty does not apply if the taxpayer had reasonable cause for the position taken on the return and acted in good faith — which is why disclosure and documentation of uncertain tax positions matters.
