Are there penalties for not filing a tax return for a child with $4,000 of unearned income?
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Yes, there are penalties for not filing a tax return for a child with $4,000 of unearned income if a return is required.
1. Filing Requirement
For 2025, a child who can be claimed as a dependent must file a tax return if their unearned income exceeds the filing threshold. The threshold for unearned income is $1,250 in 2024 and is adjusted for inflation, but for 2025, the threshold is $1,350. Since $4,000 is well above this threshold, the child is required to file a tax return.
2. Penalties for Not Filing
If a required return is not filed, the following penalties may apply:
1. Failure-to-File Penalty (IRC §6651(a)(1))
- The penalty is 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25% of the unpaid tax.
- If the return is more than 60 days late, the minimum penalty is the lesser of $525 (for 2025) or 100% of the tax due.
2. Failure-to-Pay Penalty (IRC §6651(a)(2))
- If tax is owed and not paid by the due date, an additional penalty of 0.5% of the unpaid tax per month (up to 25%) applies.
3. Interest
- Interest accrues on any unpaid tax and penalties from the due date of the return until paid in full.
4. Additional Penalties
- If the failure to file is due to fraud, the penalty increases to 15% per month, up to 75% of the unpaid tax.
- If the IRS determines that the failure to file or pay was due to intentional disregard or fraud, accuracy-related penalties (20% of the understated tax) or civil fraud penalties (75% of the underpaid tax) may apply.
3. Who Is Liable?
The child is legally responsible for filing their own return and for any penalties and interest. If the child is unable to file due to age or incapacity, the parent or guardian must file on their behalf, but the liability for penalties remains with the child.
4. Example
If a child with $4,000 of unearned income fails to file a required return and owes $500 in tax:- After 6 months, the failure-to-file penalty could be $125 (5% × 6 months × $500, capped at 25%).- The failure-to-pay penalty would be $15 (0.5% × 6 months × $500).- Interest would also accrue on the unpaid tax and penalties.
Summary: A child with $4,000 of unearned income is required to file a tax return. Failure to do so can result in significant penalties and interest, including a failure-to-file penalty, a failure-to-pay penalty, and possible additional penalties for fraud or intentional disregard. The child is responsible for these penalties, even if a parent or guardian files the return on their behalf.
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