The Form 1042 late filing penalty is 5% of the unpaid tax for each month or partial month the return is overdue, capped at 25% of the tax due.1Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax That headline number rarely arrives by itself. A withholding agent who missed the March 15 deadline is usually also facing a late-payment penalty, deposit penalties from earlier in the year, and per-return charges on every Form 1042-S that went out late. Stacked together, those charges can push the total above 47% of the tax owed before interest is added, and officers who controlled the money can be pursued personally for 100% of the unpaid withholding.
How the 5% Monthly Penalty Adds Up
The clock starts the day after the original due date, or the day after the extended due date if you timely filed Form 7004. Each new calendar month (or any fraction of one) adds another 5%. There is no partial-month proration.
A withholding agent who owes $100,000 and files one day into the second month has already accrued two full months of penalty, or $10,000. At six months late, the penalty hits its ceiling of $25,000 and stops growing. The penalty stops accruing when you actually file, so a late return that keeps sitting on the desk keeps costing money until it reaches the cap. Filing, even without paying, freezes this particular charge.
The Late-Payment Penalty Running in Parallel
The failure-to-pay penalty is a separate charge of 0.5% of the unpaid tax per month, also capped at 25%.1Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax A filing extension does not extend the time to pay, so this penalty starts running from the original March 15 due date regardless of whether you filed Form 7004.
When both penalties apply in the same month, the 5% filing penalty is reduced by the 0.5% payment penalty, netting to 5% per month during the overlap. After you file, the 0.5% payment penalty keeps running on its own until the tax is paid or hits its own 25% cap. The combined maximum reaches 47.5% of the tax owed.
Deposit Penalties From Earlier in the Year
Withholding tax on payments to foreign persons is not something you settle up on March 15. It gets deposited throughout the year on a monthly or semi-weekly schedule. If you missed those deposits, each missed period generates its own penalty under a tiered structure based on how late the deposit is:2Office of the Law Revision Counsel. 26 USC 6656 – Failure to Make Deposit of Taxes
- 1 to 5 days late: 2% of the undeposited amount
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- More than 10 days after a delinquency notice or upon demand for immediate payment: 15%
The tiers replace each other rather than stacking within a single deposit. A deposit 20 days late is charged at 10%, not 2% plus 5% plus 10%.3Internal Revenue Service. Failure to Deposit Penalty What does stack is the number of missed periods. A year of ignored deposits can produce a dozen separate 10% or 15% charges. For most late filers this is the single largest source of financial exposure. A separate 10% penalty also applies to deposits made outside the required electronic channel.4Internal Revenue Service. Instructions for Form 1042
Per-Return Penalties on Late Form 1042-S Filings
Every Form 1042-S filed late or incorrectly carries its own penalty. For returns due in 2026, the amounts are:5Internal Revenue Service. 20.1.7 Information Return Penalties – Exhibit 20.1.7-1
- Corrected within 30 days of the due date: $60 per return
- Corrected after 30 days but before August 1: $130 per return
- Filed after August 1 or not filed at all: $340 per return
Larger organizations with average annual gross receipts above $5 million have a maximum aggregate penalty of $4,098,500 at the highest tier. Smaller organizations are capped at $1,366,000.5Internal Revenue Service. 20.1.7 Information Return Penalties – Exhibit 20.1.7-1
Failing to furnish each recipient with their copy carries a matching penalty on top of the IRS-filing penalty, at the same per-statement rate.6Internal Revenue Service. Penalties Related to Form 1042-S If the IRS finds the failure was intentional, the rate jumps to $680 per return or 10% of the amounts required to be reported, whichever is greater, with no maximum.7Internal Revenue Service. 2025 Instructions for Form 1042-S
An organization sending 500 Forms 1042-S after August 1 is looking at $170,000 in penalties on the IRS filings alone, and double that if the recipient copies are also late.
Interest on Top of Everything
Interest runs on unpaid tax from the original due date until the balance clears, compounding daily. The individual and standard corporate underpayment rate is 7% per year for the first quarter of 2026.8Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 The rate drops to 6% for the second quarter beginning April 1, 2026, with large corporate underpayments at 8%.9Internal Revenue Service. Internal Revenue Bulletin 2026-08
Interest cannot be abated for reasonable cause. It is waived only when the charge resulted from an unreasonable IRS error or delay. Even a successful penalty abatement leaves interest in place.
Personal Liability for Officers and Signers
Amounts withheld from payments to foreign persons are trust fund taxes, held for the government rather than owned by the business. Any responsible person within the organization who willfully fails to collect and pay over those taxes can be held personally liable for 100% of the unpaid amount under the trust fund recovery penalty.10Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
The IRS reads “responsible person” broadly. Officers, directors, controlling shareholders, and anyone with authority to decide which creditors get paid can fall inside it. If you could sign checks or direct payments and chose to pay other obligations while the withholding went unremitted, you are exposed personally. Volunteer board members of tax-exempt organizations who serve honorarily, take no part in financial operations, and had no actual knowledge of the failure are outside the reach of the penalty.
Before assessing, the IRS must send a written preliminary notice at least 60 days in advance.10Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax That window is when you contest the assessment, not after it lands.
One boundary worth naming: everything above assumes negligence or ordinary noncompliance. If the IRS finds fraud, a 75% civil fraud penalty applies to the fraudulent portion,11Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty and willful failure to pay over withholding is a federal felony carrying up to $10,000 in fines and up to five years in prison.12Office of the Law Revision Counsel. 26 USC 7202 – Willful Failure to Collect or Pay Over Tax
Getting the Penalty Reduced
Two paths lead to relief, and the choice depends on your compliance history.
First-Time Abatement
First-time abatement forgives a single lapse for taxpayers with a clean prior record. You qualify if you have filed all required returns, paid or arranged to pay any tax owed, and gone penalty-free for the three tax years before the year at issue. It covers the failure-to-file, failure-to-pay, and failure-to-deposit penalties.13Internal Revenue Service. Administrative Penalty Relief
You request it by calling the number on your penalty notice. Approved requests are processed on the call. If the representative cannot approve relief over the phone, you can submit Form 843 in writing.14Internal Revenue Service. Penalty Relief
Reasonable Cause
Reasonable cause is the fallback when first-time abatement is off the table. The standard is whether you exercised ordinary business care and prudence and still could not meet the deadline because of circumstances beyond your control.15Internal Revenue Service. Discussion of Form 1042, Form 1042-S and Form 1042-T Recognized situations include serious illness or death of a key person, destruction of records by fire or natural disaster, and reliance on incorrect written advice from the IRS.
The request goes in as a written statement, signed under penalties of perjury, with documentation.16Internal Revenue Service. Reasonable Cause and Good Faith – LBI Concept Unit “We didn’t know about the requirement” almost never works. The IRS wants specifics: what steps you took to comply, what event prevented compliance, and how you responded when you found the problem. File the delinquent return and pay the underlying tax before you ask for abatement. Requests land better when the compliance gap has already been closed.