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What Are the Penalties for Filing Taxes Late?

How the IRS and Washington state sort out tax debts

Ideally, your taxes are filed and paid on-time every time—and if you're lucky, you even get a refund. But as we all know, life is far from ideal, and there are times where you may end up with a past-due return or outstanding tax debt. So how does the IRS and the Washington Department of Revenue (DOR) deal with these situations?

IRS Penalties & Interest

At the federal level, the IRS may assess separate penalties for “failure to file” a return and “failure to pay” any tax due by the payment deadline. The failure-to-file penalty is actually more severe, so it is always in your best interest to file your Form 1040 by the deadline, even if you are unable to immediately pay the balance due.

“If it’s at all possible to file on time, you should—even if you can’t pay,” says Amber K. Quintal, a tax and estate planning attorney at Ogden Murphy Wallace in Seattle. “Filing on time will get you out of fairly substantial failure-to-file penalties. The failure-to-pay penalties are lower. Sometimes people don’t file because they don’t have the money, but that’s really shooting yourself in the foot.”

If you cannot file by April 15, the IRS has an olive branch in Form 4868. If you file it, the IRS will grant a six-month extension and save you from that penalty—assuming you file within the extension period. That said, it won’t absolve you of failure-to-pay penalties.

The failure-to-file penalty is 5 percent of any unpaid taxes owed for each month your return is late. This penalty starts on the day after the return is due and can accrue up to 25 percent of the total tax debt. The failure-to-pay penalty is 0.5 percent of the tax due for each month past the filing deadline. Note that you will still be charged a failure-to-pay penalty during any extension period unless you paid 90 percent of your estimated tax due prior to the original April 15 deadline.

Finally, the IRS will charge daily compounded interest on any unpaid taxes, regardless of the cause or whether you have an extension. The exact amount of interest is based on the Federal Reserve's short-term interest rates plus 3 percentage points.

Washington Excise Tax Late-Payment Penalties

The State of Washington does not impose a personal income tax. But all businesses, including self-employed individuals, must file a Combined Excise Tax Return. This covers multiple taxes a person or entity may owe to the DOR, including the business and occupation tax, state and local sales taxes, use taxes, and lodging taxes. When initially registering your business, the BOR will direct you to file excise returns on a monthly, quarterly or annual basis.

State law requires the DOR to assess a late penalty of 9 percent for any tax not paid by the applicable due date. These penalties increase after the tax is overdue for more than one month. For example, a business required to file a quarterly return by July 31 will be charged a 9 percent penalty starting on August 1, followed by a 19 percent penalty starting September 1, and finally a 29 percent penalty if any tax is still due as of October 2.

Avoiding Collection Activity

The IRS has the power to garnish wages, sweep bank accounts and foreclose on property. But first, they must provide you with notice and give the opportunity for due process. “Often what happens is somebody gets a notice of intent to levy or a notice of lien and they’ll freak out,” Quintal says, “which is when they contact an attorney.”

A qualified Washington tax attorney can advise you on how to avoid such collection scenarios and resolve your tax debts with the IRS or DOR. They can, for instance, argue on your behalf that you have a good reason for being delinquent. “If there’s a reasonable cause for failing to file or pay on time, the IRS can remove those penalties. It’s a pretty high bar—it’s not ‘I didn’t have the money’ or ‘I just didn’t get to it’—but in some cases, there really is a valid reason,” Quintal says. “It would be things like someone died, there was a major illness, a fire—something really big or sudden.”

There are other avenues to pursue, as well. If there is a mistake, you can contest the underlying debt. If they intend to take too much, there are protections to keep you from being destitute. If you can’t pay at the moment, you could request the IRS put you on currently-not-collectable status for a short-term reprieve.  You could also ask for a payment arrangement, such as monthly installments. “And with all of these things there is a lot of paperwork that goes into it, and the IRS has specific standards of what they’ll agree to, so it’s not a freewheeling negotiation,” Quintal adds.

Tax attorneys know the standards and paperwork well. The deadlines are short and the processes can be difficult to navigate, so be wary.

“With all things taxes, the earlier the better. If you get a notice, open it as soon as possible and contact counsel as soon as possible.”

If you want more information on this area of law, see our tax overview.

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