In 1789, Benjamin Franklin wrote to the French scientist Jean-Baptiste Leroy: “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” Back then, there was no income tax – the federal government was funded mostly by taxes on imports, determined and paid when goods were brought into the country. What Franklin was resigned to is the payment of taxes. Fast forward more than 230 years, that’s still how many people think about taxes though our federal tax system has evolved. Taxpayers today bear distinct obligations to file a tax return reporting tax owed and to pay such tax. Moreover, the penalty for failure to file is much stiffer than the penalty for failure to pay. Too many taxpayers conflate their obligations and neglect to file if they cannot pay.
Both the failure-to-file penalty and the failure-to-pay penalty are found in section 6651 of the Internal Revenue Code. The failure-to-file penalty under subsection (a)(1) is 5% of the amount of net tax due – i.e., the amount of tax required to be shown on the return less any applicable payments or credits – when the return is up to a month late and another 5% each additional month or fraction of a month the return is late up to 25% in total. The failure-to-pay penalty under subsection (a)(2) is similar except that the penalty is .5% of the amount of next tax due for each month or fraction of a month that the payment is late up to 25% in the aggregate. The failure-to-file penalty is essentially an order of magnitude greater for the first six months a taxpayer is not in compliance.
There are some nuances. For each month both penalties apply, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty such that a taxpayer owes no more than 5% per month and does not reach the 25% cap on the failure-to-file penalty until the sixth month a return is late. Nevertheless, a taxpayer who has not filed a return or paid the tax owed faces penalties each month of 5% of the net tax due and maximum penalties of 50%, while a taxpayer who has filed but not paid faces a penalty each month of .5% of the net tax due and a maximum penalty of 25%.
Taxpayers may request relief from the failure-to-file penalty and the failure-to-pay penalty under the IRS’s First Time Abate program if no penalties were imposed the preceding three years. Beyond that, taxpayers who don’t pay the tax they owe because they lack the means have limited but important options to reduce their liability if they are current on their filing obligations, such as an offer-in-compromise. For taxpayers who don’t file on time, typically there are no options. Section 6651 includes an exception to failure-to-file penalty liability when the failure to file “is due to reasonable cause and not due to willful neglect.” But a 1985 Supreme Court case, United States v. Boyle, squeezed most of the life out of that exception.
In Boyle, the Court construed filing deadlines strictly in recognition that, while arbitrary, they are necessary to administer our system of self-reporting by millions of taxpayers. At issue was a late-filed estate return that the attorney hired to prepare and file the return overlooked because he never marked the deadline in his calendar. The Court concluded that the attorney’s mistake did not demonstrate reasonable cause because taxpayers have a non-delegable duty to file a return by an unambiguous deadline. The Court was careful to note that taxpayers may reasonably rely on professional tax advice regarding filing obligations, but “[i]t requires no special training to ascertain a deadline and make sure that it is met.” Thus, Boyle does not foreclose reasonable reliance in unusual situations where a taxpayer consults a tax professional just to discern the deadline. There are also situations in the e-filing context, in which a tax professional fails to e-file a return unbeknownst to the taxpayer, that courts have recently found reasonable cause. But in the vast majority of cases, the reasonable-cause-and-not-willful-neglect exception is out of reach.
Filing a tax return timely or as timely as possible is the first step of tax compliance and minimizes penalty liability. While not as renown as death and taxes, that too is certain.
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