Clarification on Failure to File Penalty for late 2022 tax return with Schedule C income

The Failure to File penalty situation is pretty straightforward but often misunderstood. Here's what your brother-in-law is looking at: The extension only extends the filing deadline, not the payment deadline. The tax was still due April 15, 2023 regardless of extension. Since he missed the original April 15 deadline for filing the extension, he's going to be subject to the Failure to File penalty for the period between April 15 and when he actually filed the extension in June. The Failure to File penalty is calculated at 5% of the unpaid tax per month or part of a month, up to a maximum of 25%. Even a day late counts as a full month for this calculation. So he'll have penalties for April and May (10% total). Once he filed the extension in June, that stopped the Failure to File penalty from continuing to accrue, as long as he files the actual return by the extended deadline (October 15, 2023). If he missed that extended deadline too, then the penalty would start accruing again. He'll also have a separate Failure to Pay penalty of 0.5% per month on the unpaid tax, which continues until the tax is fully paid.

I went through something similar last year with a side business that blew up unexpectedly. I was completely lost with all the penalties and couldn't get anyone at the IRS to clearly explain things to me. I eventually found https://taxr.ai which was a lifesaver. Their system analyzed my tax documents including the late filing notices and broke everything down in plain English. Showed me exactly how the Failure to File penalty was calculated, what I could potentially get waived, and provided templates for responding to the IRS. Saved me from a ton of stress trying to decode IRS notices! For your situation, they have specific guidance on late extensions and Schedule C income issues. Worth checking out if you want clarity on exactly what penalties your brother-in-law is facing.

Just wanted to update about my experience with taxr.ai since I was asking about it before. I ended up checking it out for my 2021 penalties, and it actually worked really well! I uploaded my IRS notices and they showed me that I qualified for first-time penalty abatement since I had a clean record for the three prior years. They guided me through writing a proper abatement request letter with all the right language and specific IRS codes to reference. Got about $2,300 of my $3,000 in penalties removed! The system explained exactly which penalties could be abated and which couldn't (apparently the Failure to Pay penalties continue even with abatement). Definitely saved me more than I expected.

If your brother-in-law is getting the runaround from the IRS about these penalties, I highly recommend using Claimyr (https://claimyr.com). I was in a similar position with penalties from a late 2021 return, and couldn't get through to anyone at the IRS for months. Claimyr got me connected to a real IRS agent in about 45 minutes when I had been trying unsuccessfully for weeks. There's a demo of how it works here: https://youtu.be/_kiP6q8DX5c. Basically, it navigates the IRS phone tree for you and calls you back when an actual human is on the line. The IRS agent I spoke with was able to put my account on hold while we sorted out the penalty issue and explained exactly what documentation I needed to submit for abatement. Definitely worth it rather than waiting on hold forever or getting disconnected repeatedly.

I need to eat my words about Claimyr being a scam. After posting my skeptical comment, I was desperate enough to try it for my own situation with the IRS (owed taxes from 2020 that had accumulated a bunch of penalties). After trying for literally months to get through on my own, Claimyr connected me with an actual IRS agent in about an hour. The agent went through my entire file, found that some payments hadn't been properly credited, and adjusted my account. Ended up reducing what I owed by over $1,400! What surprised me most was how helpful the IRS agent was once I actually got to speak with a real person. They even told me I qualified for a payment plan with a much lower monthly payment than I thought was possible. Completely changed my perspective on dealing with the IRS.

Just a pro tip on the Failure to File penalty - if your brother-in-law has a clean tax history for the past 3 years (filed and paid on time), he might qualify for First Time Penalty Abatement. The IRS doesn't advertise this much, but it's an administrative waiver they can grant. I had a similar situation in 2020 where I completely missed the filing deadline because of some family emergencies. Called the IRS, explained my situation, mentioned I had a clean record for the previous years, and they removed about $1,200 in penalties on the spot. Definitely worth asking about!

One important clarification - the Failure to File penalty is calculated as 5% per month of the UNPAID tax. If he paid most of what he owed and only had a small balance due, the penalties would be much smaller than if he paid nothing. For example, if he owed $10,000 but paid $9,000 with his late extension, the 5% penalty would only apply to the remaining $1,000 (so $50 per month rather than $500 per month if he paid nothing).