Another April 15 has passed, and summer is around the corner. But an extension for filing taxes is not necessarily a summer vacation for taxpayers to pay what they owe the Internal Revenue Service.
When a taxpayer fails to pay the tax shown on their tax return by the due date, regardless of whether they have an extension to file, the IRS will assess a failure to pay penalty under IRC § 6651(a)(2). That penalty is typically 0.5% of the unpaid tax for each month, or part of a month, that the tax isn't paid — but could go up to a maximum of 25%, depending on circumstances.
That penalty is separate from interest on the tax liability, which will also accrue following the original tax deadline.
Fortunately, a balance due on an extended tax return — for 2025 individual returns, that moved filing deadline is Oct 15, 2026 — does not automatically incur a late-payment penalty. After penalties are assessed, advisors can demonstrate significant value for clients who have filed extensions by creating plans for potential relief or mitigation.
Here are four such such strategies.
Confirming That IRS Penalty Notices Are Correct
Various issues may trigger an erroneous IRS penalty assessment, such as misapplied extension payments, estimated tax payments credited to the wrong year, duplicate assessments, payments made under the wrong spouse's Social Security number, or payments posted with an incorrect date.
As soon as an IRS penalty notice is received, the advisor should examine it with the client, as well as the IRS account transcript and proof of payment. If the penalty notice is a mistake, it can be rectified without having to pursue other strategies for managing or mitigating late payments.
First-Time Penalty Abatement
If the penalty notice is correct and in order, the most straightforward option for taxpayers is the IRS First-Time Penalty Abatement. This relief is available to taxpayers with a strong history of paying their taxes on time — if the IRS did not assess a late-payment penalty within the previous three years, then the agency will waive it.
This relief is especially useful for typically compliant taxpayers who have experienced an unusual year, with occurrences such as unexpected business income, a large capital gain, tax-withholding that is too low, or a liquidity event causing them to come up short on April 15.
Before the 2025 tax year, taxpayers had to formally request First-Time Penalty Abatement. However, according to Erin M. Collins, the IRS' national taxpayer advocate, the agency intends to automatically apply the abatement, when applicable, beginning with 2025 tax returns. Despite this favorable change in procedure, advisors can help eligible clients stay vigilant to ensure that they receive the abatement.
Reasonable Cause Relief
If taxpayers are not eligible for First-Time Penalty Abatement, they may still qualify for relief based on reasonable cause. The IRS evaluates reasonable cause on a case-by-case basis, considering whether the taxpayer exercised ordinary business care and prudence (but was nevertheless unable to pay on time). The IRS also considers whether the taxpayer would suffer undue hardship by paying their tax by the due date.
Examples of reasonable cause for relief could be serious illness, death or unavoidable absence, civil disturbances, natural disasters, inability to obtain records, or system issues that prevented timely electronic filing or payment. On its own, a lack of funds is usually not sufficient for a reasonable cause waiver.
The IRS will also presume reasonable cause if the unpaid tax does not exceed 10% of the amount of tax shown on the taxpayer's return, and the balance due is paid with the extended return.
Documentation is key for obtaining reasonable cause relief. A request for the relief should include a clear timeline, the amount and timing of payments, the event that prevented timely payment, the steps taken to comply and records to support what is mentioned. Advisors can assist with ensuring that clients keep track of, and organize, this documentation.
Interest Management
The abatement of penalty payments can also reduce interest on the late tax. When the IRS waives penalties, the agency automatically removes related interest on those penalties. But interest on the underlying tax balance will continue to accrue until it is paid in full. Advisors can work with clients to anticipate, and pay off, that interest.
Patrick Malloy is co-director of national tax practice and strategy at Crescent Grove Advisors.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.