1040-US: Calculation of combined failure to file (FTF) and failure to pay (FTP) penalties

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IRS filing deadline update

The IRS MeF system is now processing returns, and the filing deadline has been extended to 11:59 PM on Wednesday, April 18, 2018. For the latest details, see UltraTax CS alerts and notices.

Question

The tax application is reducing the Failure to File (FTF) penalty, why?

Answer

When both the FTF and Failure to Pay (FTP) penalties are present on a return, the FTF does not calculate to the maximum penalty of 25 percent of the total tax due.

The limitation of the FTF penalty in the presence of the FTP penalty is in accordance with Publication 17 - Your Federal Income Tax. Whenever both penalties are present, FTF is reduced to the extent that FTP already penalized the same months that the delinquent payment remained outstanding. Therefore, if the payment was delinquent for five months or longer (the maximum amount of time over which the FTF penalty is calculated, for a maximum at 25 percent), then both FTF and FTP would have been assessed on those five months. In this instance, FTF must be reduced by the .5 percent for each month that was already penalized by FTP, leaving a total of 22.5 percent of FTF penalty.

Note: Whenever an FTF penalty is present, an FTP penalty will also be present (unless the penalty has been suppressed on Screen Pen, located under the Payments folder); therefore, this is a very common scenario. When the FTP is suppressed, the FTF penalty will still be reduced to the extent of the FTP penalty.

Per Publication 17, Page 19, “Combined Penalties. If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $205 or 100% of the unpaid tax.”

Related topic: Extension FAQs (1040)

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