IRS Inflation-Adjusted Tax Penalties You Need to Know for 2025

ByRandall Brody FBAR For Expats
IRS Inflation-Adjusted Tax Penalties for 2025: What You Need to Know

Facing a Penalty? Here’s Why Staying Updated Matters

You know that sinking feeling you get when you realize you’ve missed a deadline or made a mistake on your taxes? Well, things are about to get pricier if you’re not careful. For 2025, the IRS has announced inflation-adjusted tax penalties that could make your wallet hurt even more. Let’s break down what these penalties are, how they’ve changed, and what you can do to avoid them.

Because, let’s be honest, nobody wants to pay extra money to the IRS.

What Are Inflation-Adjusted Tax Penalties?

Every year, the IRS adjusts various tax rates, deductions, and penalties to keep up with inflation. These adjustments ensure that penalties maintain their intended impact over time. Simply, it means the IRS updates how much they can fine you for things like filing late, underpaying taxes, or submitting inaccurate returns.

For 2025, several penalties are seeing increases. If you’ve got tax obligations to manage, it’s time to take note of these changes and avoid unnecessary fines.

Here’s a breakdown of the key penalties adjusted for 2025.

1. Failure-to-File Penalty

The failure-to-file penalty is one of the most common penalties taxpayers face. If you don’t submit your return by the due date (usually April 15), you could face a penalty of 5% of the unpaid tax per month, up to a maximum of 25% of the unpaid balance.

For 2025, the minimum penalty for filing more than 60 days late has increased to $525 or 100% of the unpaid tax amount, whichever is smaller. This is an increase from the previous year’s minimum penalty of $510.

2. Failure-to-Pay Penalty

If you don’t pay your tax balance by the due date, the failure-to-pay penalty applies. This penalty is 0.5% of the unpaid taxes per month, and it can also increase to 1% if the IRS issues a notice of intent to levy.

For 2025, while the percentage remains the same, the accumulated penalty over several months could add up due to inflation-adjusted tax amounts.

3. Accuracy-Related Penalty

The accuracy-related penalty applies when you underpay the tax shown on your return due to negligence or a substantial understatement of your tax liability. This penalty is 20% of the underpayment amount.

For negligence or disregard of IRS rules, the penalty kicks in when you fail to make a reasonable effort to follow tax laws. This could include not keeping records to back up your deductions or failing to report income shown on a Form 1099.

A substantial understatement of tax happens if you understate your tax liability by 10% of the amount required to be shown or $5,000, whichever is greater. If you claim the Section 199A Qualified Business Income Deduction, the threshold drops to 5%.

4. Information Return Penalties

Businesses and individuals who fail to file required information returns, such as Form 1099, are subject to penalties. The penalty amounts depend on how late the forms are filed.

For 2025, the penalties are as follows:

  • $60 per form if filed within 30 days of the due date
  • $130 per form if filed more than 30 days late but before August 1
  • $330 per form if filed after August 1 or not filed at all
  • $660 per return for intentional disregard of filing requirements.

5. Foreign Bank Account Reporting (FBAR) Penalty

If you have a foreign bank account with over $10,000 at any point during the year, you must file an FBAR. Missing this requirement can lead to penalties.

For non-willful violations, the penalty is up to $10,000 per form, not per account. The IRS may waive this penalty if you can show reasonable cause, like a misunderstanding of the rules.

Willful violations carry much steeper penalties. You could face a fine of 50% of the account balance or $100,000, whichever is greater. In severe cases, there could also be criminal penalties, including hefty fines and possible imprisonment.

6. Business Late-Filing Fees

The IRS also imposes penalties on businesses for failing to file tax returns on time. For partnerships and S corporations, the late-filing penalty for 2025 has increased to $255 per partner or shareholder per month, up from $245 in 2024.

For example, if a partnership with three partners files its return three months late, the penalty would be $765 per partner, totaling $2,295.

7. Interest on Unpaid Taxes

In addition to penalties, the IRS charges interest on unpaid taxes. The interest rate is the federal short-term rate plus 3%, adjusted quarterly. As of the fourth quarter of 2024, the interest rate is 8% for individuals.

Even if penalties are waived for reasonable cause, interest continues to accrue on any unpaid balance.

8. Tax Preparer Penalties

If you’re a tax preparer, the IRS has specific penalties you need to watch out for, and they’re not cheap. The penalties target mistakes made when filing returns that include certain credits, like the Earned Income Tax Credit (EITC) or the Child Tax Credit. Here’s what you need to know about the updated penalties for 2025:

  • Due Diligence Requirements: If you don’t meet the IRS’s due diligence requirements when filing claims for credits like the EITC, you’re looking at a penalty of $650 per failure per credit. For example, if you miss due diligence steps for both the EITC and Child Tax Credit on one return, that’s $1,300 in penalties.
  • Failure to Sign a Tax Return: The IRS charges $65 per return if you forget to sign a client’s return, with a maximum penalty of $32,500 per year. 
  • Failure to Provide a Copy of the Return to the Client: If you don’t give your client a copy of their filed return, you face another $65 per return, capped at $32,500 annually.
  • Negotiating a Client’s Refund Check: Here’s a big no-no. If you sign or deposit a client’s refund check, the penalty is $650 per check with no maximum limit. The IRS considers this a serious violation, so don’t even think about it.
  • Failure to Retain a Copy of the Return or Filing List: Tax preparers must keep a copy of each return they file or maintain a list of returns prepared. The penalty for not doing so is $65 per failure, with a cap of $32,500 annually.
  • Failure to File Correct Information Returns: If a tax preparer fails to file correct information returns (such as Form 1099), the penalty is $60 per return or item in the return, with a maximum penalty of $32,500 per year.\

9. Passport Revocation for Serious Tax Debt

If you have a seriously delinquent tax debt exceeding $65,000 in 2025, the IRS can request the State Department to revoke, deny, or limit your passport under the FAST Act.

This can be a major issue for international travelers. If you’re planning a trip and have outstanding tax debts, it’s best to resolve them before your passport becomes a problem.

10. Tax Evasion Penalties

The IRS doesn’t take tax evasion lightly, and neither should you. Tax evasion is when someone deliberately avoids paying taxes, whether by underreporting income, claiming false deductions, or hiding money offshore. The consequences can be severe, with both financial and criminal penalties.

Here’s what you could be facing if you’re caught evading taxes:

  • Up to $100,000 fines for individuals.
  • Up to $500,000 fines for businesses.
  • Up to five years behind bars.

How to Avoid IRS Penalties

Here are some practical steps you can take to avoid falling afoul of IRS penalties:

1. File on time, every time. Even if you can’t pay your taxes immediately, submitting your return on time can save you from the harshest penalties.
2. Pay what you can. Partial payments are better than no payments. The failure-to-pay penalty is lower than the failure-to-file penalty.
3. Request an Extension. If you need more time to file your return, request an extension using Form 4868. Remember that this extends your filing deadline but not your payment deadline.
4. Stay Accurate. Double-check your return for errors to avoid accuracy-related penalties. Use reliable tax software or consult a tax professional if needed.
5. File Required Forms. Ensure that all required forms, including information returns and FBARs, are submitted on time.
6. Hire a tax professional. If your tax situation is complicated, a pro can help you avoid costly mistakes.

How to Get IRS Penalties Reduced or Waived

If you’ve been hit with penalties,  there are ways to reduce or even eliminate those fines if you qualify. The IRS offers penalty abatement programs that can give you some relief, but you’ll need to know what applies to your situation.

  • First-Time Penalty Abatement: If this is your first penalty and you’ve filed and paid on time for the past three years, you can request first-time relief. It’s a one-time offer, but it can save you a lot of money.
  • Reasonable Cause Relief: If something beyond your control caused the issue, like a natural disaster, serious illness, or relying on incorrect advice, the IRS might waive the penalty. You’ll need to provide proof.
  • IRS Error: If the IRS made a mistake when assessing the penalty, you can request a correction. It happens more often than you’d think.

To request penalty abatement, you can call the IRS or file Form 843. But remember, even if the penalty is waived, interest on unpaid taxes doesn’t stop. It’s best to pay off the balance as soon as you can.

If you’re unsure about your options, talk to a tax professional. They can help you figure out the best approach and improve your chances of getting those penalties reduced.

What If I Can’t Pay My Taxes?

If you can’t pay your tax bill in full, don’t ignore it. The IRS offers several options to help taxpayers manage their obligations:

Don’t Let Penalties Catch You Off Guard

Tax penalties can be costly, especially with inflation-adjusted increases for 2025. Staying informed about these changes can help you avoid unexpected charges. Make sure to file your return on time, pay any balances due, and submit all required forms to avoid these penalties.

If you’re unsure about your tax situation, consider seeking professional tax assistance. At Tax Samaritan, we specialize in helping expats and other taxpayers manage their U.S. tax obligations. Contact us today to learn more about how we can help you stay compliant and avoid costly penalties.