IRS Income Tax Penalty Notices: What Individuals and Businesses Need to Know

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Ergedine Pericles, CPA | April 2, 2025

Introduction

Receiving an IRS penalty notice can feel overwhelming—whether you’re an individual taxpayer or a business owner. Penalties for late filing, underpayment, or reporting inaccuracies can create unexpected financial strain. This guide outlines the most common IRS income tax penalties and best practices to prevent or resolve them.

Common IRS Income Tax Penalty Notices

1. Failure to File (FTF) Penalty

When It Applies

This penalty applies when you fail to submit your income tax return by the official due date, including any approved extensions. Forms that must be filed include:

• Form 1040 (Individuals)
• Form 1065 (Partnerships)
• Form 1120 (Corporations)
• Form 1120-S (S Corporations)

IRS Notices

• CP162 Notice: Sent to partnerships with more than 101 partners that failed to file electronically or obtain a waiver.
• CP162A Notice: Sent to S Corporations and Partnerships that filed late.

Penalty Details

• 5% of unpaid taxes per month, up to a maximum of 25%.
• If the return is over 60 days late:

  – Individuals or Corporations: $510 (2025 tax year) or 100% of the unpaid tax (whichever is less).

  – S Corporations or Partnerships: $245 (2025 tax year) per partner or shareholder, per month (up to 12 months).

2. Failure to Pay (FTP) Penalty

When It Applies

This penalty occurs when you don’t pay the full amount of tax owed by the original due date—regardless of whether you requested a filing extension.

Note: An extension to file does not mean you have more time to pay your taxes.

Penalty Details

• 0.5% of the unpaid tax per month, up to a maximum of 25%.
• If the IRS sends a Notice of Intent to Levy and payment still isn’t made within 10 days, the penalty increases to 1% per month.
• If both the Failure to File and Failure to Pay penalties apply, the Failure to File penalty is reduced by the amount charged for Failure to Pay.

3. Accuracy-Related Penalties

When It Applies

This penalty applies if you underpay taxes due to negligence, ignoring tax rules, or significantly understating your income.

Penalty Details

• Often added during audits or through the IRS Automated Underreporter system.
• Common causes include unreported income or claiming deductions/credits that aren’t allowed.

  – For individuals: Applies if you understate your tax by more than 10% of the tax owed or $5,000 — whichever is greater.

  – For corporations: Applies if the understatement exceeds the lesser of 10% of the tax (or at least $10,000) or $10 million.

• The penalty is typically 20% of the tax you should have paid.

4. Estimated Tax Penalties

Taxpayers must pay taxes throughout the year as they earn income, either through withholding (e.g., from a paycheck) or estimated tax payments. Failing to do so can lead to penalties.

A. Individuals

When It Applies

This penalty applies to individual taxpayers and some estates or trusts that don’t pay enough in estimated taxes throughout the year. Quarterly payments are due April 15, June 15, September 15, and January 15 of the following year.

Penalty Details

If you owe $1,000 or more after subtracting withholding:

• You must pay the lesser of:

  – 90% of the current year’s tax, or

  – 100% of last year’s tax.

• If your prior year’s adjusted gross income was over $150,000 (or $75,000 if married filing separately), you must pay 110% of last year’s tax.

B. Corporations

When It Applies

Corporations, nonprofits with unrelated business income, and private foundations may face penalties if they fail to make estimated tax payments when required.

IRS Notices

• CP173 Notice: Sent when a corporation fails to pay sufficient estimated taxes.

Penalty Details

• Due dates: April 15, June 15, September 15, and January 15 (calendar year) or the 15th day of the 4th, 6th, 9th, and 12th months for fiscal-year taxpayers.
• You must pay the lesser of:

  – 100% of the current year’s tax, or

  – 100% of last year’s tax.

• Applies if the tax due (after credits) is $500 or more.

Avoiding Income Tax Penalties: Best Practices

• File on time: Submit all required tax forms by the due date, including extensions.
• Pay on time: Schedule payments through secure methods like Automated Clearing House (ACH) or Electronic Federal Tax Payment System (EFTPS).
• Use reliable software: QuickBooks Online and similar tools help prevent errors.
• Report accurately: Include all income and only claim deductions or credits you qualify for.
• Consult a professional: A licensed tax advisor can help you stay compliant and reduce risk.

How to Address These Penalties

The IRS provides penalty relief in certain cases—but the process is complex. Our firm can help you determine eligibility and prepare your request.

Learn More: How to Remove IRS Tax Penalties and Get Relief.

Conclusion

IRS penalty notices can be intimidating, but understanding them helps you take control. Whether you’re dealing with one now or want to avoid them in the future, professional guidance makes a big difference.