If you owe tax and fail to file a return on time, the IRS can assess both civil and criminal tax penalties. The penalty for failure to file is separate from the penalty for failure to pay taxes, and both civil and criminal penalties can be assessed for the same return.
Penalty for File to File a Tax Return
The penalty for failure to file is 5 percent of the tax owed per month. Contrast that with the failure to pay penalty of only half a percent per month, and you can see why it is a good idea to file your return on time, even if you cannot pay your tax.
Code § 6651(f) applies to a fraudulent failure to file a return. The penalty is 75% of the tax on unfilled returns. The IRS must show by clear and convincing evidence that you committed tax fraud.
Tax fraud is a willful violation of tax law, rather than a mistake or intentional wrongdoing. Civil tax penalties are much more common than criminal tax penalties.
However, failure to file is also one of the badges of tax fraud. If you have other tax issues that may subject you to liability for criminal tax penalties, such as understatements of income, your failure to file will make it more likely that the IRS will consider criminal prosecution against you. Consult with a criminal tax attorney if you are facing any criminal tax sanctions.
How to Avoid the Failure to File Penalty
File your taxes on time, even if you cannot pay right away. The failure to file penalty is often ten times higher than the failure to pay penalty. Inability to pay is not a good reason to miss the deadline to file your return.
If you are up against the deadline to file and need more time to get your paperwork in order, you can file for an extension. You may owe penalties or interest on your tax liability, but you will avoid the failure to file penalty.
You may be able to arrange an installment agreement, or possibly an Offer in Compromise if you cannot pay due to financial hardship.
In some cases, you can also avoid penalties if you can show a reasonable cause for your failure to file, such as a medical hardship.