Quick overview

Tax penalties are extra amounts the IRS adds when you don’t file, don’t pay, or don’t pay enough during the year. They’re meant to encourage compliance and cover the cost of enforcement. In my 15+ years advising individuals and small businesses, I’ve seen penalties grow quickly when people miss a deadline or underestimate required payments. The sooner you act, the more options you have to limit extra cost.

Sources for readers: IRS penalty guides and forms (see IRS: Penalties and IRS: Estimated Taxes) — these pages have the latest rates and procedures (irs.gov).

How the IRS typically calculates the most common penalties

Below I explain the rules you’ll see most often. Exact dollar amounts and interest rates can change; always check the current IRS pages listed at the end.

1) Failure-to-file (FTF)

  • What it targets: Not filing your return by the due date (including extensions). Filing an extension gives more time to file but not to pay.
  • How it’s measured: The FTF penalty is generally a percentage of the unpaid tax for each month (or part of a month) your return is late.
  • Typical rate structure: Commonly 5% of the unpaid tax per month, capped at 25% of the unpaid tax. If both an FTF and a failure-to-pay (FTP) penalty apply in the same month, the FTF rate is often effectively reduced because the two penalties interact — consult the IRS for exact mechanics.

2) Failure-to-pay (FTP)

  • What it targets: Not paying the tax you owe by the due date.
  • How it’s measured: A smaller monthly percentage applied to unpaid tax, historically around 0.5% per month, accumulating until the tax is paid or the cap is reached. Interest also accrues on the unpaid balance.

3) Underpayment of estimated tax (estimated tax penalties)

  • Who this affects: Self-employed people, freelancers, small business owners, people with large investment income, or anyone who doesn’t have enough tax withheld during the year.
  • How it’s measured: The IRS computes the penalty on the underpaid amounts for each quarter using their interest rate schedule. Practically, the IRS compares what you paid (withholding + estimated tax payments) to either: (a) 90% of your current year tax, or (b) 100% of last year’s tax (110% if your adjusted gross income was over a threshold such as $150,000). Meeting either safe harbor generally avoids the penalty.
  • Form used: The IRS uses Form 2210 or an automatic computation to determine the penalty amount.

4) Interest

  • Interest is charged on unpaid tax from the due date until paid. The IRS interest rate is set quarterly and is based on the federal short-term rate plus a statutory percentage; it compounds daily. Interest is separate from penalties and continues until the balance is paid in full.

5) Combined rules and minimum penalties

  • A return that is both late and unpaid may be hit by both FTF and FTP charges (subject to caps). The IRS may also assess minimum penalties for returns filed more than a specified number of days late — check the current guidance for exact minimum-dollar rules.

Authoritative sources: IRS pages on penalties, interest, estimated taxes, and Form 2210 (irs.gov).

Simple numeric examples (hypothetical)

Example 1 — Failure-to-file and failure-to-pay together:

  • Tax due: $10,000, return filed 3 months late, no payment made.
  • FTF: 5% per month × 3 months = 15% → $1,500
  • FTP: 0.5% per month × 3 months = 1.5% → $150
  • Total penalties: $1,650 plus interest on the unpaid $10,000 from the due date.

Example 2 — Missed estimated payments (underpayment):

  • Annual tax liability: $20,000. You withheld $12,000 and paid $4,000 in estimated taxes.
  • Underpayment during the year: $4,000. The IRS computes a quarterly-based penalty using its quarterly interest rates; the result might be a few hundred dollars depending on timing and rates.

Note: These examples simplify the IRS computations. The agency prorates underpayments by quarter and applies compound interest rules. Use Form 2210 or tax software to get exact numbers, or consult a tax pro.

Practical strategies to avoid penalties (what I do with clients)

1) File on time even if you can’t pay in full

  • Filing your return limits or eliminates the failure-to-file penalty. If you can’t pay, file and then work with the IRS on payment options.
  • If you expect to owe but need time to gather information, submit Form 4868 for an extension to file; note that this does not extend time to pay.

2) Pay what you can by the due date

  • Even partial payment reduces interest and the failure-to-pay penalty. The IRS accepts online payments; consider a debit/credit pay (fees may apply) or an Electronic Federal Tax Payment System (EFTPS) transfer.

3) Use safe-harbor planning for estimated taxes

  • Aim to pay at least 90% of the current year’s tax or 100% of last year’s tax (110% if your income is above the higher-income threshold). If you meet a safe harbor, you avoid underpayment penalties even if you owe at filing.
  • For irregular income, make quarterly payments tied to income when earned or use an annualized-income installment method (Form 2210) to reduce penalties.
  • See our guide on Estimated Tax Payments for more detailed methods and calendars: Estimated Tax Payments: Calculating and Avoiding Penalties.

4) Keep withholding optimized

  • If you are an employee and have other income (investment, side business), adjust W-4 withholding so more tax is taken from paychecks to reduce or eliminate the need for estimated payments.

5) Consider an IRS payment plan early

6) Ask for penalty relief when you have reasonable cause

  • The IRS provides penalty relief when taxpayers have reasonable cause (serious illness, natural disaster, or other valid reasons). Document the facts and request abatement in writing or via IRS procedures. First-Time Penalty Abatement (FTA) is also available to qualifying taxpayers.

7) Correct payroll and reporting errors quickly

  • Employers who correct payroll deposit or reporting mistakes early and work with the IRS can often reduce or avoid penalties. For guidance, see payroll-specific penalty rules at the IRS.

What to do if you receive a penalty notice

1) Read the notice carefully — it explains the penalty, period in question, and how the IRS computed the amount.
2) Verify the IRS math using your records and Form 2210 (if related to estimated tax). Many penalty notices are correct, but some stem from mismatched or missing information.
3) Respond promptly. If you disagree, follow the appeal instructions in the notice and send supporting documentation.
4) If you have reasonable cause, request abatement and include facts, dates, and supporting records (medical records, disaster declarations, proof of death, etc.).
5) Consider professional help if the amount is large or the facts are complex.

Authoritative IRS guidance on responding to notices and penalty relief is available at the IRS: Getting Penalty Relief page (irs.gov).

Common pitfalls I see with clients

  • Relying on an extension to avoid penalties (extensions only delay filing, not payment).
  • Underestimating the need for estimated tax payments for non-wage income.
  • Waiting to respond to IRS notices. Timely responses preserve abatement options and negotiation leverage.

Records and documentation to keep

  • Copies of filed returns, W-2s, 1099s, proof of payments (bank statements, EFTPS confirmations), estimated tax vouchers, correspondence with the IRS, and any documentation supporting a reasonable-cause claim.

Final tips and disclaimer

In practice, a combination of timely filing, smart withholding, predictable estimated payments, and clear documentation prevents most penalties. When a mistake happens, act immediately: file, pay what you can, and request reasonable-cause relief if warranted.

This article is educational and not individualized legal or tax advice. Rules, rates, and thresholds change; consult the IRS webpages below or a qualified tax professional for decisions specific to your situation.

Authoritative sources and further reading

Related FinHelp guides

If you’d like, I can produce a one-page worksheet showing how to calculate FTF/FTP charges on a sample balance or a checklist to support a reasonable-cause request.