Failure to File Penalties on balance that was paid

[equinecpa]

I have a couple of clients that have been assessed failure to file penalties but didn't owe when they actually filed the return. Here is the scenario:

Clients filed timely extensions
Clients owed as of 10/15 so made payment of calculated balance due at that time.
Clients filed accurate return in December
Clients have been accessed late filing penalties based on the balance that they owed but paid by deadline.

I thought late filing penalties could only be accessed if there was a balance due?

[ATSMAN]

https://www.irs.gov/newsroom/eight-facts-on-late-filing-and-late-payment-penalties

[rbynaker]

An extension extends the time to file, not the time to pay. Taxes were due by 4/15. There will be failure to file penalties assessed between 4/15 and 10/15. Had they filed by 10/15 then there would only be failure to pay penalties assessed (and then only if less than 90% of the tax was paid by 4/15).

[Rapid Robert]

Clients owed as of 10/15 so made payment of calculated balance due at that time.

I thought late filing penalties could only be accessed if there was a balance due?

The balance was due on 4/15 and according to your facts, not paid timely, so there was a balance due. There is an automatic reasonable cause waiver of failure to pay penalty if 90% of the balance due is paid with a timely filed extension, and the remaining 10% or less is paid by the extended due date when the return is filed. This also does not seem to be your facts. The failure to file penalty does not have an automatic reasonable cause waiver.

The link posted by ATSMAN is a good place to start to learn the basics of filing and payment deadlines, and penalties for missing them.

[equinecpa]

Here is where I'm getting stuck:

Excert from IRS page referred to above:" The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes."

Clients paid in full by 10/15.

They are being charged late filing penalties for 2 months (Nov/Dec) on the balance they paid in Oct. Reading above it's on unpaid taxes...they had no unpaid taxes in Nov or Dec.

[rbynaker]

The "tax filing due date" is 4/15. The "tax filing due date including extensions" is 10/15. Taxes have to be paid by the original tax filing due date.

[Rapid Robert]

They are being charged late filing penalties for 2 months (Nov/Dec) on the balance they paid in Oct. Reading above it's on unpaid taxes...they had no unpaid taxes in Nov or Dec.

You should be glad it's not California - they would go back to April for the penalty. Let's face it - the taxpayer had unpaid taxes by the 4/15 payment deadline, and the client failed to file a return by either the original or extended due date. Why you think making a late payment (Oct 15) of taxes that should have been paid on 4/15, will somehow eliminate the uncontested failure to file is not clear to me.

Look at it this way - if it worked they way you wanted it to, then why would anyone ever bother to file a return, as long as they could simply pay six months late? Doing it your way, there would never be a penalty for not filing.

[Rapid Robert]

They are being charged late filing penalties for 2 months (Nov/Dec) on the balance they paid in Oct. Reading above it's on unpaid taxes...they had no unpaid taxes in Nov or Dec.

It's based on the balance that was unpaid on 4/15. (Assuming they paid nothing on 4/15, which is what I infer from your initial post).

[equinecpa]

The "tax filing due date" is 4/15. The "tax filing due date including extensions" is 10/15. Taxes have to be paid by the original tax filing due date.

This explanation makes sense, though doesn't explain why the calculation is for Nov/Dec only.

I have always filed returns on 10/15 even if not 100% complete due to just this reason. Then this past year I read somewhere it's better to pay in what you think will be owed and then file a late accurate return rather than amend, I'll return to my former practice.

[Lion]

"Somewhere" is not substantial authority.

[TaxGuyBill]

Extension changed the due date to file to October. So it was filed two months late.

§6651(a)(1) imposes the 5% penalty for each month it was FILED late. So that is why the penalty is based on 2 months.


Due date for payments is April.

§6651(a)(1) actually imposes the 5% penalty on the TOTAL tax (before withholding, credits and payments), but then (b)(1) reduces that based on the withholding, credits and payments "paid on or before the date prescribed for payment of the tax". So (a)(1) imposed the penalty on the number of months past October 15th, but (b)(1) essentially states the penalty is based on the AMOUNT that is not paid by April 15th.

https://www.law.cornell.edu/uscode/text/26/6651