IRS Penalties for Late Filing: What You'll Pay and How to Avoid It

The IRS has a penalty for almost everything. Here are the most common ones that affect international founders and small business owners.

Late filing penalties

Form 1120 (Corporation return):

• •5% of unpaid tax per month, up to 25%
• •Minimum penalty for returns over 60 days late: lesser of $510 or 100% of unpaid tax

Form 1065 (Partnership return):

• •$235 per partner per month, up to 12 months
• •A 2-partner LLC that's 6 months late = $2,820

Form 1040-NR (Individual return):

• •5% of unpaid tax per month, up to 25%

Form 5472 (Foreign-owned corporation info):

• •$25,000 per form per year
• •This is the big one for foreign founders

Late payment penalties

All returns:

• •0.5% of unpaid tax per month, up to 25%
• •Plus interest (currently ~8% annual rate)

Note: If both late filing AND late payment penalties apply, the late filing penalty is reduced by the late payment amount. Maximum combined penalty is 5% per month.

Estimated tax underpayment

• •Interest on the underpaid amount, calculated quarterly
• •Currently around 8% annual rate

How to avoid penalties

• •File on time. Even if you can't pay, file the return. The late filing penalty (5%/month) is 10x the late payment penalty (0.5%/month).

• •File extensions. Form 7004 and Form 4868 are free and automatic. There's no reason not to file them.

• •Pay what you can. Partial payment reduces the base for penalty calculations.

• •Keep records. If you face a penalty, having organized records supports a reasonable cause argument.

Getting penalties removed

First-time penalty abatement (FTA). If you have a clean history for the prior 3 tax years, you can request automatic removal of penalties for one year. Call the IRS or write a letter.

Reasonable cause. If you can show you had a good reason for the failure (illness, natural disaster, reliance on professional advice), the IRS may waive penalties. Write a detailed explanation and include supporting documentation.

Statutory exceptions. Certain situations automatically excuse penalties, like being in a federally declared disaster area.

The cost of procrastination

A quick example: Foreign-owned LLC with $0 tax due, filed 6 months late without extension.

• •Form 1120 late filing penalty: $0 (no unpaid tax)
• •Form 5472 penalty: $25,000
• •Total: $25,000 for a return that reported zero income

File. On. Time.