Common IRS Penalties and How to Avoid or Reduce Them

Key Takeaways

Failure to File charges 5% per month (capped at 25%); file on time even if you can't pay to minimize exposure.
Failure to Pay is typically 0.5% per month (up to 25%), but increases to 1% if the IRS sends a levy notice, or drops to 0.25% with an active installment agreement.
Estimated tax penalties apply when withholding falls short; meet the 90% or 100%/110% safe harbor rules to avoid them.
Accuracy-related penalties (negligence or substantial understatement) add 20% of the underpaid tax amount.
Penalty abatement is available through reasonable cause, statutory exceptions, or administrative waivers—document your situation and respond promptly.

Understanding IRS Penalties

Unpaid or late taxes don't only involve your original balance. When tax obligations aren't met, the IRS can impose penalties that increase your total amount due and make repayment more challenging. Knowing common penalty types, their rates, maximum caps, and how to avoid or reduce them is essential for staying compliant and protecting your finances.

Failure to File Penalty

If you don't file by the tax deadline (or the requested extension deadline) and you owe taxes, the IRS charges a failure to file penalty. This penalty is 5% of your unpaid tax for every month or partial month your return is late. Like the failure to pay penalty, it caps at 25% of your unpaid balance.

Important Reminder

The deadline to file your 2024 tax return is April 15, 2025. An extension to file is not an extension to pay—any taxes owed are still due by the original filing deadline.

To avoid this penalty, file your tax return on time, even if you're unable to pay the full amount owed. Filing for an extension can help avoid the failure to file penalty, but remember that extensions only extend your filing deadline, not your payment deadline.

Failure to Pay Penalty

In addition to the failure to file penalty, the IRS imposes a failure to pay penalty for taxpayers who don't pay their taxes by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax remains unpaid. However, it won't exceed 25% of your unpaid taxes.

Situation	Penalty Rate	Notes
Standard failure to pay	0.5% per month	Applied until paid or capped at 25%
After levy notice (10-day window)	1% per month	Increases if unpaid after notice
With active payment plan	0.25% per month	Reduced rate while in good standing

Setting up a payment plan can reduce your penalty burden while you work toward full payment.

Underpayment of Estimated Tax

If you don't withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don't pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th, and January 15th of the next year. The penalty rate can change quarterly. As of Q3 of 2025, individuals are charged 7% on underpaid tax while large corporations are charged 9%.

How to Avoid This Penalty

You can avoid the estimated tax penalty by meeting one of two requirements:

• Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding.
• Pay 100% of last year's tax bill before withholding or tax credits. If your adjusted gross income (AGI) exceeds $150,000, pay 110% of last year's tax.

Accuracy-Related Penalties

Taxpayers who file inaccurate tax returns may be subject to accuracy-related penalties. Common reasons for receiving this penalty include not reporting all income or claiming deductions or credits you don't qualify for.

Negligence or Disregard of Rules Penalty

This penalty applies to those who don't follow tax laws or are careless when preparing their return. Examples include not reporting all income or failing to verify deductions that result in a refund that seems too good to be true.

Substantial Understatement of Income Tax Penalty

This penalty applies when you understate your tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.

Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income.

How to Avoid Accuracy-Related Penalties

Taxpayers should ensure their returns are accurate and complete. Maintain documentation to support income, deductions, and credits claimed. If you're unsure about a deduction or credit, consult a tax professional or refer to IRS publications.

IRS Penalty Abatement

Penalties imposed by the IRS can significantly increase the amount owed and create financial hardship. However, under certain circumstances, taxpayers may be eligible to have these penalties reduced or eliminated entirely through penalty abatement. Taxpayers may request penalty abatement for reasons such as reasonable cause, statutory exceptions, or administrative waivers.

1. Reasonable Cause

One common reason for requesting penalty abatement is demonstrating "reasonable cause." This means showing there was a valid reason beyond your control that prevented you from complying with tax obligations.

Examples of reasonable cause include:

• Serious illness or incapacitation
• Natural disasters or casualty events
• Death in the family
• Unavoidable absence
• Fire, casualty, or other circumstances beyond your control

Taxpayers must provide documentation or evidence to support their claim of reasonable cause.

2. Statutory Exceptions

Some penalties may have statutory exceptions that allow for penalty relief under specific circumstances. For example, certain penalties may be waived if you can demonstrate you acted in good faith or relied on incorrect advice from the IRS.

3. Administrative Waivers

In some cases, the IRS may offer administrative waivers for certain penalties. These waivers are typically granted on a case-by-case basis and may be available for first-time offenders or taxpayers who have a history of compliance with tax laws.

Penalty relief may be requested via phone or by mailing Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, you may be able to appeal the decision.

Interest on Penalties

Remember, the IRS charges interest on penalties, and interest will continue to increase your balance until it's paid in full. Since interest on underpayments begins on the tax due date, it's important to act as quickly as possible to resolve your tax issue.

Act Quickly

If you can pay your balance in full, you should do so immediately to stop interest from accruing. If you cannot afford to pay in full, explore options including payment plans or tax relief programs.

Frequently Asked Questions

Can I avoid penalties if I can't pay my taxes?

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Yes—file your return on time even if you can't pay. This avoids the larger failure to file penalty (5% per month). You'll still face the failure to pay penalty (0.5% per month), but setting up a payment plan can reduce it to 0.25% per month while you pay.

What qualifies as reasonable cause for penalty abatement?

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Common examples include serious illness, natural disasters, death in the family, unavoidable absence, or circumstances beyond your control. You must provide documentation to support your claim.

How do I request penalty abatement?

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You can request penalty abatement by phone or by mailing Form 843, Claim for Refund and Request for Abatement. Include documentation supporting your request (reasonable cause, statutory exception, etc.). If denied, you may appeal.

What's the difference between failure to file and failure to pay penalties?

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Failure to file is 5% per month (up to 25%) and applies when you don't submit your return on time. Failure to pay is 0.5% per month (up to 25%) and applies when you don't pay taxes owed by the deadline. Both can apply simultaneously, but the failure to file penalty is capped at the failure to pay amount when both apply.

Can I avoid estimated tax penalties if my income changes mid-year?

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Yes—you can adjust your quarterly payments to reflect income changes. However, you must still meet the 90% safe harbor for the current year or the 100%/110% safe harbor based on last year's tax to avoid penalties. Review your estimated payments mid-year and adjust as needed.

Need Help with IRS Penalties?

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Common IRS Penalties and How to Avoid or Reduce Them

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Valor Tax Relief Team