Let’s face it, paying taxes is already tough enough. Don’t make it worse by piling unnecessary IRS penalties and interest on top of your tax bill. As we head through the 2026 tax filing season for 2025 tax returns, there are three major IRS penalties I want business owners, freelancers, and taxpayers to understand:
These penalties, plus interest, can add up fast. The good news is that most of these problems are avoidable if you understand the rules, know your deadlines, and have a plan.
The failure-to-pay penalty generally kicks in when you don’t pay the taxes you owe by the original payment deadline. For most individual taxpayers filing their 2025 federal income tax return, that deadline is April 15, 2026.
And here's an important point I talk about all the time: filing an extension does NOT extend your time to pay. An extension gives you more time to file your tax return. The IRS still expects you to estimate and pay what you owe by April 15.
The failure-to-pay penalty is generally 0.5% of your unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%. And that's not the only cost.
The IRS also charges interest on unpaid taxes. The interest rate is determined quarterly and interest compounds daily, so I don't want you relying on an old article or last year's interest rate when calculating what your balance could cost you.
In other words, the longer you wait, the more expensive that tax bill gets.
If you enter into an approved IRS installment agreement and filed your return on time, the failure-to-pay penalty generally drops to 0.25% per month while the agreement is in effect. Interest, however, continues to accrue.
First and foremost, pay on time if at all possible. For business owners, freelancers, and people earning substantial 1099 income, I also like having a separate savings account dedicated to taxes. When income comes in, move money into that account before you convince yourself it's available to spend.
As a general planning rule, I often recommend setting aside at least 20% of small-business, side-gig, or 1099 income, although your actual tax liability may be higher or lower depending on your income, deductions, state taxes, entity structure, and overall tax situation.
If you're approaching April 15 and aren't sure exactly what you'll owe, don't use uncertainty as an excuse to send nothing. Work with your tax professional to make a reasonable estimate and pay as much as you can by the deadline. And if you simply can't pay the entire balance, don't ignore it. File your return or extension on time and immediately look at your options, including an IRS payment plan.
Let's say you properly file an extension for your 2025 tax return by April 15, 2026, but you still owe $10,000 in federal income taxes that you don't pay. Your extension generally gives you until October 15, 2026 to file your individual federal income tax return. It does not give you until October to pay that $10,000.
The failure-to-pay penalty generally continues accumulating each month the balance remains unpaid, and IRS interest is added on top. That's why I tell taxpayers over and over again: Extend the return if you need more time. Don't confuse extending the return with extending the payment.
Now we get to the painful one. The failure-to-file penalty generally applies when you don't file your 2025 tax return by April 15, 2026 and you haven't obtained a valid extension, or when you get an extension and then fail to file by the October 15, 2026 extended deadline.
The failure-to-file penalty is generally 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%. However, there's an important detail when the failure-to-file and failure-to-pay penalties apply during the same month. The failure-to-file penalty is generally reduced by the failure-to-pay penalty for that month. That generally results in a combined penalty of 5% for the month, rather than simply stacking 5% and 0.5% on top of each other.
For returns required to be filed after December 31, 2025, if the return is more than 60 days late, a minimum failure-to-file penalty can also apply. And remember, interest can continue accumulating on unpaid taxes too.
This one is simple: FILE YOUR RETURN. If you're an individual taxpayer and aren't ready to file your 2025 return by April 15, 2026, file Form 4868 and get an automatic six-month extension.
I am a HUGE fan of extensions when they're used properly.
Maybe you're waiting on a K-1. Maybe your bookkeeping isn't finished. Maybe there's a transaction your CPA needs more time to analyze. Maybe you're still gathering information.
I'd rather have you extend and file an accurate return than rush through a complicated return just because you're terrified of the April deadline.
But remember the rule: an extension gives you more time to file, not more time to pay. Estimate your 2025 tax liability, pay what you reasonably expect to owe by April 15, 2026, and then use the additional time to get the return right.
If you're due a refund, the failure-to-file penalty generally isn't assessed because it's based on unpaid tax. But don't use that as an excuse to leave an unfiled return sitting around indefinitely. There are deadlines for claiming refunds too.
This goes for both individuals and businesses. The IRS doesn't necessarily want you waiting until April 2026 to pay all of the tax you owe on income you earned during 2025. The federal income tax system is essentially pay-as-you-go.
If you're a W-2 employee, much of this happens automatically through withholding from your paycheck. But if you're self-employed, running a business, receiving substantial 1099 income, earning investment income, or otherwise receiving income without sufficient withholding, you may need to make estimated tax payments during the year.
For your 2025 taxes, estimated payments generally fell due during 2025, with the final installment due in January 2026. Generally, individuals should consider estimated tax payments if they expect to owe at least $1,000 in tax after subtracting withholding and refundable credits.
There are important safe-harbor rules that can help you avoid an underpayment penalty.
Generally, you can avoid the penalty if your withholding and timely estimated tax payments equal at least:
For certain higher-income taxpayers, that second threshold becomes 110% of the prior year's tax if your 2024 adjusted gross income exceeded $150,000, or $75,000 if married filing separately. These rules are incredibly useful because sometimes you simply don't know exactly what you're going to make during the year.
If your business takes off and your income suddenly doubles, predicting 90% of your current-year tax can be difficult. Using the prior-year safe harbor can give you a much clearer target.
Here's another mistake I see. Someone realizes late in the year that they haven't made enough estimated payments, so they send the IRS one giant check and assume everything is fixed. Not necessarily. The IRS calculates the underpayment penalty based on when payments were required and when they were actually made. Paying extra later doesn't automatically erase an underpayment from earlier in the year.
There are exceptions and alternative calculation methods, including the annualized income installment method, which can be particularly important when your income isn't earned evenly throughout the year.
For example, if your business earns most of its profit during the fourth quarter, you may have a very different situation than someone who earns the same amount evenly from January through December. The key is to plan your estimated payments instead of guessing at them.
Don't automatically assume you have to write the check without asking questions. The IRS has penalty-relief procedures, and depending on the facts, you may qualify to have certain penalties removed.
One possibility is First Time Abate, an administrative waiver that can apply to certain penalties when you have a history of filing and paying on time and meet the IRS requirements. There is also reasonable-cause relief in certain circumstances. The IRS looks at the facts and circumstances surrounding why you failed to file, pay, or meet another tax obligation.
This isn't permission to ignore a deadline because you were busy. But if something legitimate prevented you from complying, find out whether penalty relief applies before simply accepting the bill. And remember, removing a penalty doesn't necessarily eliminate the underlying tax or all associated interest.
The worst thing you can do is ignore the IRS. Penalties, interest, and notices don't magically disappear because you don't open the envelope. Know your deadlines. File an extension when you need one. Pay as much as you reasonably can by the payment deadline. Make your estimated tax payments throughout the year. Keep accurate records. And if something goes wrong, deal with it immediately rather than letting a manageable problem become an expensive one.
But here's the bigger issue for business owners: if you're constantly surprised by your tax bill, scrambling to make estimated payments, or getting hit with penalties, the problem probably isn't just the deadline. You need a better tax plan. Book a Comprehensive Tax and Business Consultation with my team at KKOS Lawyers. They can look at your business, income, entity structure, deductions, estimated payments, and overall tax picture to help you build a proactive strategy instead of finding out what you owe after the year is already over. Stop paying penalties that could have been avoided and start planning before the IRS gets another unnecessary dollar from you.