Key Takeaways
- The IRS generally holds you, the taxpayer, responsible for a late return even when a paid preparer caused the delay.
- The failure to file penalty runs at 5 percent of the unpaid tax for each month or part of a month, up to 25 percent. Filing now stops that part; the failure to pay penalty runs until the balance is paid.
- A late 2025 or later return on Form 1040, 1065 or 1120 can get the new Automatic Exemption from Penalty if the prior three years were clean, and an eligible return it doesn't consider can still get First Time Abate on request.
- Fix the filing first, then calculate exposure, then check for clean-history relief, then decide what to do about the relationship.
Who the IRS Holds Responsible
Suppose a Sugar Land business owner finds out in July that the return their CPA was supposed to file in April never went in. The first question is whose fault it is.
The IRS answers that on its own reasonable cause page. You're generally responsible for complying with tax law even if someone else handles your taxes, and you should know what your tax preparer files and get proof that your return or payment is sent on time (IRS, https://www.irs.gov/payments/penalty-relief-for-reasonable-cause).
So the account is yours and the penalty sits on your balance until it is paid or removed. The preparer has obligations of their own, and two relief routes exist that don't depend on proving fault, but every step starts from the fact that the IRS is looking at you.
What the Penalties Actually Are
The failure to file penalty is 5 percent of the tax due, less any tax paid on time and available credits, for each month or partial month the return is late, up to a maximum of 25 percent. If the return is more than 60 days late, a minimum applies: the lesser of $525 (the IRS figure for returns due after December 31, 2025, indexed each year) and 100 percent of the underpayment (IRS, https://www.irs.gov/payments/failure-to-file-penalty).
The failure to pay penalty is 0.5 percent of the unpaid taxes for each month or part of a month the tax remains unpaid, and it will not exceed 25 percent. It rises to 1 percent per month if you do not pay within 10 days of a notice of intent to levy. The IRS lists a reduced 0.25 percent rate during an approved payment plan and conditions it on the return having been filed on time, so a late filer shouldn't count on it (IRS, https://www.irs.gov/payments/failure-to-pay-penalty).
When both apply in the same month, the failure to file penalty is reduced by the failure to pay amount for that month, so the two together run at 5 percent. After five months the failure to file penalty maxes out, while the failure to pay penalty keeps running. The IRS also charges interest on penalties, and that interest keeps adding to what you owe until the balance is paid in full (IRS, https://www.irs.gov/payments/administrative-penalty-relief).
On $20,000 of unpaid tax, that combined 5 percent is $1,000 for each of the first five months. After that the failure to file part stops and the failure to pay part keeps going, with interest on top. Payroll deposit penalties follow a separate schedule, explained in payroll tax penalty cost for Houston businesses.
The Texas Side of a Missed Deadline
A Texas taxable entity has a second filing the IRS never sees. The annual franchise tax report is due May 15, and a $50 penalty is assessed on each report filed after the due date. If tax is paid 1 to 30 days after the due date, a 5 percent penalty is assessed. If tax is paid over 30 days after the due date, a 10 percent penalty is assessed (Texas Comptroller, https://comptroller.texas.gov/taxes/franchise/).
Statutory interest begins accruing on the 61st day after the due date of a required report (Texas Comptroller, https://comptroller.texas.gov/taxes/file-pay/penalties.php). Leave the report unfiled long enough and the Comptroller issues a notice of intent to forfeit the right to transact business (Form 05-211, same franchise tax page), which is a real problem for a Missouri City contractor trying to sign a new job.
If your accountant missed the federal deadline, check the state one the same day. The report itself is covered in Texas franchise tax explained.
Step One: File Now, Argue Later
Every month the return stays unfiled adds another month of penalty, until the cap. Nothing you do about fault, refunds or the firm changes that clock. So the first move is to get the return filed, even with a different preparer and even if you can't pay the full balance.
If the deadline hasn't passed yet and the CPA has gone quiet, file the extension yourself. An extension moves the filing date only. The IRS is explicit that it does not grant you an extension of time to pay (IRS, https://www.irs.gov/payments/failure-to-pay-penalty). Pay what you can estimate by the original due date and the failure to pay penalty shrinks with it.
If you can't pay in full, ask for a payment plan anyway. The failure to pay penalty and interest run on whatever is still unpaid, so every dollar paid down early is a dollar the penalty stops touching.
And keep proof of filing this time: an e-file acknowledgement, a certified mail receipt, or a copy of the return with the submission ID.
Step Two: Check for Clean-History Relief Before You Argue Fault
The IRS has two waivers that rest on your filing history rather than your excuse, and which one applies depends on the year of the late return (IRS, https://www.irs.gov/payments/administrative-penalty-relief).
For 2025 tax year returns and later, and for quarterly returns from 2026, there's the Automatic Exemption from Penalty, which the IRS started in summer 2026. It covers Forms 1040, 1065 and 1120, the payroll forms 940, 941, 943, 944 and 945, and Form CT-1. The IRS describes the test as having timely filed returns and paid tax due for the three prior years (or 12 consecutive quarters for quarterly filers). If the return is eligible and IRS records show that history, the failure to file, failure to pay and failure to deposit penalties aren't assessed at all, and the failure to pay penalty doesn't build up on the unpaid tax. The IRS sends a notice saying the relief was applied, and you don't need to contact the IRS or reply to it. You still owe any unpaid tax and interest.
For earlier years, and for an eligible 2025 tax year or 2026 quarterly return that wasn't considered for the automatic exemption, First Time Abate still applies. It isn't automatic. The penalty is assessed first and removed later, and only if you ask. You don't have to name the waiver or send documents: call the toll-free number in the top right corner of your notice, or send a written statement or Form 843, Claim for Refund and Request for Abatement.
First Time Abate has its own test. The same return type as the original was filed on time for the prior three years (or 12 consecutive quarters for quarterly filers), and either no penalty other than the estimated tax penalty was assessed, or one was assessed and later removed for reasonable cause or IRS error. Businesses have two more conditions: the IRS didn't waive the failure to deposit penalty four or more times in that period, and no failure to deposit penalty was charged for avoiding EFTPS.
If a notice shows an assessed penalty and you think the automatic exemption should have covered it, the IRS says to contact it. If you don't qualify for either waiver, you may request relief based on reasonable cause instead, and the IRS will notify you of its decision (same IRS page). Check the history route first and keep the fault argument in reserve.
Step Three: Build a Reasonable Cause File
Reasonable cause is determined on a case-by-case basis considering all the facts and circumstances of your situation. The IRS lists examples that qualify: fires, natural disasters or civil disturbances, inability to get records, death, serious illness or unavoidable absence of the taxpayer or immediate family, and system issues that delayed a timely electronic filing or payment (IRS, https://www.irs.gov/payments/penalty-relief-for-reasonable-cause).
A preparer who forgot isn't on that list, and the same page says you're generally responsible even if someone else handles your taxes. Given both of those, don't count on reliance on your CPA to carry a request by itself.
When you request relief, the IRS asks you to explain what happened and when, how the situation prevented you from filing or paying on time, and what attempts you made to file or pay. Supporting documents can include hospital or court records or a doctor's letter with start and end dates, documentation of natural disasters, copies of relevant written letters and responses, and copies of receipts, forms or other documentation (same IRS page). If you do ask, put together what you actually have before you call, and expect the IRS to decide on the facts of your case.
Step Four: What the Firm Is Actually on the Hook For
Preparer penalties exist, and they cover the content of the return and the preparer's own paperwork rather than a missed deadline. Under section 6694, a preparer who takes an unreasonable position faces $1,000 or 50 percent of their income from the return, whichever is greater, and willful or reckless conduct raises that to $5,000 or 75 percent. Under section 6695, failing to sign the return, failing to give you a copy, or failing to include a PTIN carries a per-failure penalty, which the IRS lists at $60 for 2025 and adjusts for inflation each year (IRS, https://www.irs.gov/payments/tax-preparer-penalties). Those amounts go to the IRS and don't reduce your balance.
Money is a private matter between you and the firm, and it runs through two documents: the engagement letter, which sets out what the firm agreed to do and by when, and the firm's professional liability policy, if it carries one. Ask in writing whether the firm has coverage and how a claim is made.
Another route is the Texas State Board of Public Accountancy. The public can file a complaint against a Texas CPA at https://www.tsbpa.texas.gov/consumers/complaint/, and the Board's individual licensee search at https://portal.tsbpa.texas.gov/php/fpl/indlookup.php shows whether the person holds a license (the firm search is at https://portal.tsbpa.texas.gov/php/fpl/frmlookup.php). A complaint goes to the Board, which decides whether an investigation is warranted. It concerns the license, not your IRS balance.
Before any of that, confirm the person was a CPA at all. What a preparer can do when a return is questioned depends on which kind they are, which is the subject of CPA vs tax preparer vs enrolled agent.
Step Five: Decide What to Do About the Relationship
Three questions settle most of it. Did the firm tell you, or did the notice? Did they take responsibility in writing, including help with the abatement request? And do you now have a calendar of every filing they handle for you, with confirmations after each one? If the answer to any of those is no, the case for staying is thin.
If you decide to move, collect your returns, your general ledger file and your prior-year workpapers before you give notice. The full sequence is in when to switch CPAs in Houston.
The practical order for the whole situation, start to finish:
- File the late return now, with whoever can file it fastest. The failure to file penalty stops accruing the day it goes in; the failure to pay penalty and interest keep running on whatever is still unpaid.
- Check the Texas franchise tax report the same day. It has its own May 15 deadline and its own $50 late penalty.
- Work out the exposure from the IRS notice: failure to file, failure to pay, and interest, using the rates above.
- For an eligible 2025 or later return, look for the IRS notice saying the automatic exemption was applied. Otherwise, request First Time Abate by phone or Form 843 if your prior three years were clean. If neither fits, consider a reasonable cause request.
- Ask the firm in writing about its engagement letter terms and professional liability coverage.
- Decide about the relationship last, with the return filed and the request in.
Talk to a Houston CPA
Nguyen Accounting Group serves Houston small businesses with tax preparation, tax resolution, and bookkeeping. See how our tax resolution services and tax preparation services work, or Book Your 15-Minute Intro Call.
