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If you owe taxes and did not file your return on time, you have two separate problems. The one most people ignore is the more expensive one.
Failure-to-file and failure-to-pay are different penalties, calculated differently, and they can stack. Here is what they actually cost you.
Key Takeaways
- The failure-to-file penalty is 5% of the unpaid tax per month, up to 25% of unpaid tax (or 22.5% when both penalties run simultaneously), and it starts the moment your return is late.
- The failure-to-pay penalty is 0.5% per month, ten times smaller, and it runs until paid or until it hits its own 25% cap.
- If both apply in the same month, the FTF is reduced to 4.5%, for a combined effective rate of 5%. When both run simultaneously, FTF caps at 22.5% (not 25%), and FTP continues until it hits its own 25% cap.
- Filing on time even if you cannot pay eliminates the more expensive penalty entirely.
- Interest compounds on top of both penalties at the current IRS underpayment rate (7% for Q3 2026).
What Is the Failure-to-File Penalty?
The failure-to-file (FTF) penalty is assessed when you do not file your return by the due date, including any extensions you requested.
The rate is 5% of the unpaid tax per month, or fraction of a month, you are late. It maxes out at 25% of the unpaid balance, which means after five months of not filing, you have added a full quarter of your tax debt in penalties alone before a single dollar of interest runs.
If you file more than 60 days late, there is a minimum penalty: the lesser of $525 (2026 figure) or 100% of the unpaid tax. Even a small liability comes with a floor penalty once you are past that threshold.
One critical nuance: if you owe nothing, your return shows a zero balance or a refund, there is no FTF penalty. The penalty is calculated on unpaid tax, not on the fact of filing late.
What Is the Failure-to-Pay Penalty?
The failure-to-pay (FTP) penalty is assessed when you file your return but do not pay the balance by the due date.
The rate is 0.5% per month on the unpaid balance. That sounds manageable compared to FTF, and it is in the short run. It caps at 25% of the unpaid tax, but it takes 50 months to get there. FTF hits its ceiling after 5 months. FTP takes over 4 years.
If you have an installment agreement in place, the FTP rate drops in half to 0.25% per month while you are in the agreement. Still running, but at a reduced clip.
How Do They Interact When Both Apply?
Here is where people get confused.
If you neither filed nor paid by the due date, both penalties run simultaneously, but the IRS offsets them. In any month where both the FTF and FTP penalties apply, the FTF is reduced by the amount of the FTP penalty.
So instead of 5% (FTF) + 0.5% (FTP) = 5.5%, you get: 4.5% FTF + 0.5% FTP = 5% combined.
Because the FTF accrues at 4.5%/month instead of 5%, it caps at 22.5% after five months, not 25%. Once FTF hits that ceiling, FTP continues running at 0.5%/month on its own until it reaches its own 25% cap.
In practice: five months late with no filing and no payment means 22.5% in FTF penalties. On a $50,000 liability, that is $11,250 in FTF alone, plus compounding interest, before you have touched the principal.
Why Filing on Time Matters Even If You Cannot Pay
I see this pattern constantly: someone owes taxes, does not have the money, so they do not file because they figure there is no point. That logic is backwards.
Filing on time eliminates the failure-to-file penalty entirely. The failure-to-pay penalty still runs, but at 0.5%/month, ten times cheaper than what you would pay for not filing.
If you are looking at a $30,000 tax bill you cannot pay right now, here is the math difference:
- File on time, do not pay: FTP at 0.5%/month = $150/month in penalties
- Do not file, do not pay: FTF at 5%/month = $1,500/month in penalties for the first five months, then FTP continues
That gap is $1,350 per month in unnecessary penalties, for up to five months. Then interest on top. On a liability you were going to deal with eventually anyway.
File the return. Request an extension if you need it (that covers filing, not payment). Set up a payment arrangement. But file.
If you are already behind and have not filed, contact CLAW Tax Group. Getting compliant is the first step toward resolving everything else.
What About Interest?
Interest is separate from both penalties and it compounds daily.
The IRS interest rate is the federal short-term rate plus 3 percentage points, adjusted quarterly. For Q3 2026, the underpayment rate is 7% annually, compounding daily. Unlike penalties, interest cannot be waived. It is statutory and runs from the original due date until full payment.
Penalties can be removed through first-time abatement or reasonable cause. Interest on those removed penalties also gets backed out. But interest on the underlying tax? That stays.
Can These Penalties Be Removed?
Yes. Both FTF and FTP penalties qualify for penalty relief under the right circumstances.
First Time Abatement (FTA): If you have a clean compliance history, no penalties in the prior three years, you can request FTA and the IRS will typically remove both the FTF and FTP for that year. This is the fastest, cleanest path for a one-time mistake.
Reasonable Cause: If you had a legitimate reason for the failure, serious illness, natural disaster, reliance on professional advice that turned out to be wrong, you can argue for abatement based on reasonable cause. This requires documentation and some back-and-forth with the IRS.
One thing people miss: even if your FTF is already at the cap, you can still request abatement. The penalty is assessed; it can also be reversed.
If you have not filed yet and want relief, file first. The IRS generally will not process penalty abatement requests on unfiled returns. Get compliant, then fight the penalties.
The Bottom Line
The failure-to-file penalty is the most expensive routine tax mistake you can make. It is ten times the rate of the failure-to-pay penalty, and it starts accumulating the day after your return was due.
If you are behind on filing, the best move is to get the returns filed, even if you cannot pay the balance. That alone cuts your ongoing penalty exposure by 90%. From there, a payment arrangement or penalty abatement request can address the rest.
Behind on filing or sitting on a penalty balance? A consultation with CLAW Tax Group will tell you exactly where you stand and what the fastest path to resolution looks like.
Jon Call, EA | CLAW Tax Group
Schedule a consultation or call (651) 323-2255.
The content of this article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional for guidance specific to your situation.
