Don't Mess With Taxes

The Internal Revenue Service does more that issue red cards for tax penalties. Filing mistakes, unintentional or otherwise, could mean costly penalties, some of which increase due to inflation. (Photo by BOOM 💥)

The United States' tax system depends on voluntary compliance by taxpayers. But Uncle Sam is no fool.

He and his tax collectors are believers of the adage "trust, but verify."

The Internal Revenue Service also follows up on that verification with penalties when it finds taxpayers — and the professionals we pay to take care of our taxes — aren't fulfilling our tax responsibilities on our own.

The most severe punishments come via criminal tax prosecutions. The IRS also employs civil actions to get due taxes.

And many of us are familiar with the various fines and fees that are assessed when we mess up tax-wise. Yes, I am guilty here, too.

These potential added penalty costs usually are effective in stemming questionable tax actions. After all, no one wants to pay the U.S. Treasury more than absolutely necessary.

Many of the penalties also are adjusted when the IRS announces its overall annual inflation revisions. This post, Part 9 of the ol' blog's 2025 tax inflation series, examines some common inflation-affected penalties that are assessed individual and business taxpayers, as well as tax professionals.

Percentage filing and payment penalties: But before we get to those amounts that change due to the cost of living, it's worth a quick refresher on general IRS penalties for filing and paying your taxes late. These are set percentages of unpaid tax that are charged if you don't file or pay on time.

The IRS imposes a failure-to-pay penalty of 0.5 percent for each month or part of a month that tax goes unpaid, up to a total of 25 percent of the remaining amount due.

The penalty for filing late is steeper. The IRS assesses it at 5 percent of any tax due that isn't paid as of its filing date, usually April 15. Remember, even if you get an extension to file your return as late as Oct. 15, you still must pay any tax due by the April deadline.

If you miss the due date for getting your return to the IRS, the late-filing penalty could go up, like the late-payment one, to as much as 25 percent of unpaid taxes.

Monthly combined charges: In both late (or non) filing or late (or non) paying situations, the fine starts adding up for each month or part of a month that the return is late. And where you face both a failure-to-file and a failure-to-pay penalty in the same month, the combined penalty is 5 percent (4.5 percent for filing late and 0.5 percent for not paying on time) for each month or part of a month that your return was late.

If you still haven't paid after five months, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25 percent. And the maximum total penalty for failing to file and pay on time comes to 47.5 percent of the due tax (22.5 percent for late filing and 25 percent for paying late).

Just for good measure, there's also a minimum late-filing penalty if you don't get your Form 1040 to the IRS within 60 days of the due date. 2025's inflation adjustments means that next year late filers could face a $525 penalty. That's up $15 from the $510 late-filing penalty for 2024 returns.

However, the penalty could be less, depending on your tax bill. The tax code says the penalty for filing two months or more late is the lesser of the year’s penalty amount or 100 percent of the tax due.

Penalty relief, but interest still adds up: Taxpayers who have a history of filing and paying on time, but have run into a late tax situation for the first time might be able to have late filing and payment penalties abated.

This special treatment is for taxpayers who haven't been assessed penalties for the past three years and who meet other requirements. You can find more on penalty relief at the IRS' First-Time Penalty Abatement web page.

Regardless of the IRS penalty amounts, interest also accrues on unpaid taxes. The interest rate for individual taxpayers is the federal short-term rate plus 3 percent and is adjusted quarterly. For the fourth quarter of 2024 that began Oct. 1, the interest rate is 8 percent.

The IRS can remove or reduce penalties for reasonable cause, but interest charges just keep accumulating.

No tax due, no penalties: The only folks who don't have to worry about meeting the IRS timetable, at least as far as penalties, are those who don't owe. Since the penalties are based on taxes due, any percentage of zero is zero.

But as you might recall from the confusion surrounding the automatically delivered COVID-19 pandemic relief payments and Advance Child Tax Credit distributions showed, it's a good idea to file so the IRS has your up-to-date information. You also can send the IRS Form 8822 to let it know of your change of address.

And, of course, you need to file — preferably on time — to get any refund you're due.

Business late-filing fees: The IRS deals with more returns from individual taxpayers than from business filers. But as with individuals, the tax agency also whacks companies that don't file their business returns and other tax paperwork on time.

The penalty for a partnership tax return that is filed late in 2026 is $255. That's a slight increase from the current $245 penalty.

Failure to file a 2025 tax year S Corporation return also will get the owner a $255 change. Again, that's up from the current $245 penalty.

Information return penalties: The IRS also assesses inflation-affected penalties on businesses that do not file correct information returns and/or do not furnish correct payee statements. This includes the filing of, among others, Forms 1098, 1099, and W-2.

The penalty amounts are determined by average annual gross receipts for the last three years and detailed in IRS Revenue Procedure 2024-40. Just search for "failure to file information returns."

Here's a quick look at relatively smaller businesses’ potential penalties in these cases.

Entities averaging $5 million or less and that don't provide the IRS required info will face a penalty of $340 per return. That's a slight increase from the current $330 per return penalty. The total penalty amount that can accrue in the 2025 calendar year is $1,366,000. Again, that's up from the current $1,329,000 maximum.

When the required information return is corrected on or before 30 days after required filing date, the penalty in 2025 will be $60 (the same as in 2024) per return, with a $239,000 (up from $232,500 in 2024) maximum. If it's corrected after 30th day, but on or before August 1, 2026, the penalty remains at this year’s $130 per return, with a $683,000 (up from 2024's $664,500) maximum.

When the failure to file correct information returns is intentional, in most cases the penalty is the greater of $680 (up from $660 this year) or 10 percent of the aggregate amount of items required to be reported. There is no maximum penalty in intentional disregard cases.

The IRS offers more details on information return penalties at its special web page, and in Internal Revenue Manual 20.1.7, Penalty Handbook, Information Return Penalties.

Tax pro penalties, too: Since so many of us pay for help with our filing, Uncle Sam assesses penalties on tax professionals, too.

The penalty amounts vary according to the situation and whether the IRS determines the incorrect filing was willful and/or based on the tax preparer’s use of an “unreasonable position.”

These amounts are set by statute and not subject to annual inflation adjustments. However, the IRS can calculate tax preparer penalties based on:

• Number of violations,
• Regulations violated,
• Rates of inflation, and
• Tax years involved.

The various tax preparer penalty scenarios are detailed on IRS.gov’s aptly named tax preparer penalties page.

The IRS goal in whacking tax pros for bad action when it comes to clients is, of course, to discourage the use of tax strategies that a preparer knew, or reasonably should have known, were not realistic. And to get the correct amount of tax due from filers.

More tax preparer penalties: In addition to these fixed penalties, however, the IRS can assess a variety of other fines that are adjusted annually for inflation when it determines the tax pro failed to complete these tasks.

The 2025 tax-year inflation adjusted amounts for returns to be filed in 2026, both per violation and maximum that can be assessed, are:

Those $65 tax preparer potential penalties for 2025 are up from 2024’s $60 amount. The maximum penalty amounts next year are a $1,000 increase over this year’s $31,500 limit.

The minimum penalty for preparers with regard to taxpayer refund checks and tax credit eligibility diligence instances goes up $15 next year from 2024's $635 level.

Passport revocation: Finally, if you're an international traveler, make sure you pay your taxes, especially if you owe a lot. In addition to owing financial penalties on the unpaid amount, there's a physical penalty that could curb your global wanderlust. 

The Fixing America's Surface Transportation Act, or FAST Act, that became law in December 2015 included a provision that authorizes the State Department to a to revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt. The U.S. Supreme Court let that passport revocation authority stand by refusing last year to hear an affected taxpayer's case.

When this tax law took effect in 2016, the document revocation trigger was $50,000 in unpaid taxes. Each subsequent tax year, the IRS has the option to adjust this amount upward if inflation allows.

As noted in the inflation series Part 7 on international taxes, the amount of a serious delinquent tax debt that could get your passport pulled in 2024 is $65,000. This passport-related debt amount adjustment is up from 2024's tax debt trigger of $62,000.

Whether you're a taxpayer handling your taxes on your own or a tax preparer, make sure you get the filings right and right on time (or sooner!) or you'll end up paying the U.S. Treasury more in penalties.

Tax Felon Friday Saturday: Although these inflation-adjusted penalties apply to non-criminal tax cases, the IRS also uses money as punishment for those convicted of criminal tax violations.

Under Internal Revenue Code §7201, any person who willfully attempts to evade or defeat taxes can be charged with a felony, with penalties including up to $100,000 in fines ($500,000 in the case of a corporation), up to five years in prison, and the costs of prosecution.

Obviously, you don't want to break any tax laws that will get you in trouble with Uncle Sam, at either level. But some folks find themselves going from relatively small tax violations to major criminal tax trouble.

That's why this Part 9 of the ol' blog's annual tax inflation series also is doing time as the day-late Tax Felon Friday item. The shift seem appropriate since the usual posting day for felonious tax actions made way for Part 8 on inflation changes next year to retirement savings.

Also, since I'm in a double-up mood on this usual Saturday Shout Out day, this post is a shameless holler to the inflation series.

The end of inflation, or at least the series for a while: This item also marks a brief hiatus in the series.

Part 10 will be on the IRS deductible mileage adjustments. But if the IRS follows its usual schedule, those amounts likely won't be announced for a few more weeks.

In fact, it likely will be December before the IRS issues its annual revisions to the optional per-mile rates you can claim as deductions in connection with business, medical or, in military relocation cases, moving miles.

Whenever those per-mile amounts are released, I'll let you know in the pending-for-now Part 10 post. In the meantime, the box below notes how you can review this year's prior inflation series posts.

Thanks for reading this part and all the rest. And thanks especially for your tax inflation interest and explanation patience!

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