Why does the IRS assess penalties and Interest to unpaid tax debt?
Penalties and interest are punishments that the IRS places against a taxpayer that has outstanding tax debt. The IRS enforces penalties to encourage voluntary compliance of the tax code. Compliance means preparing accurate returns, filing returns in a timely manner, and paying any outstanding tax debt. Efforts made to fulfill these obligations constitute compliant behavior according to the IRS.
What types of penalties are there and how much could penalties cost me?
IRS penalties can be very costly. The IRS penalty for late filing your tax return is up to 25%. The IRS penalty for paying IRS taxes late is up to 5%. For example, you owe $10,000 of taxes from four years ago. The penalties would be $5,000. Then add interest on top of the penalties. Your total tax balance including IRS penalties and interest nearly doubled to $20,000.
Taxpayers also risk facing civil penalties if the IRS suspects tax fraud. Executives and employees in corporations may be individually assessed civil penalties by the IRS regarding employment taxes, trusts, and improper filings made by the business.
What if I have an installment agreement or I’m in CNC status, do penalties still accrue?
Yes, Penalties and interest continue to accrue on the debt until the full tax debt is paid, regardless if a taxpayer enters into an agreement with the IRS.
Is there a way to remove some or all of the penalties assessed?
Yes, Penalty Abatement is an IRS program where the IRS removes some or all of the accumulated penalties from the tax debt, substantially reducing the total of the overall amount.
Who can request abatement of penalties?
Any taxpayer who files either a personal income or business tax return and is assessed a penalty, can request penalty abatement.
Which situations will the IRS consider to remove penalties?
The IRS will remove penalties if there is reasonable cause to grant relief. Per the IRS Internal Revenue Manual, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.”
If there were circumstances beyond your control that prevented you from paying your tax debt and led to delinquency, we are able to challenge the penalties that have built up. Relief from penalties falls into four separate categories: Reasonable Cause, Statutory Exceptions, Administrative Waivers, and Correction in Service Error.
The IRS will review the facts and circumstances of your case. If you situation falls into one of the IRS categories for reasonable cause, the IRS may waive IRS penalties.
IRS Penalties Relief – 7 Reasons to Waive IRS Penalties
Reason 1: Death, Serious Illness, or Unavoidable Absence
- Your spouse became seriously ill. Your spouse took care of the taxes. You did not file on time because you had to attend to your spouse.
- You had a major drug problem. You were in rehab for a couple of years. As soon as you were clean, you started to address your tax duties.
- Your child passed away. Physically and mentally you could not take care of your taxes.
- You were incarcerated. You promptly addressed your tax duties when you got out.
Reason 2: Fire, Casualty, Natural Disaster, or Other Disturbance
- Your neighborhood was hit by a hurricane, tornado, or earthquake.
- Your office caught on fire and destroyed all your business records.
- There was a major flood in your area and your home was seriously damaged. You had to take care of your living situation before dealing with taxes.
Reason 3: Unable to Obtain Records
- Your employer was late on providing you a W-2. The W-2 was received after the tax return was due.
Reason 4: Mistake was Made
- Your tax return was filed. You discovered a mistake made on the tax return. You took steps to correct the mistake.
Reason 5: Erroneous Advice or Reliance
- Generally, you will not be granted penalty relief for relying on your accountant, CPA, bookkeeper, bank, or any other third party.
- The IRS may waive IRS penalties for oral or written advice provided by the IRS.
Reason 6: Ignorance of the Law
- You did not know you had to file a tax return.
- You earned Social Security income for years. You were not required to file a tax return. This year your spouse passed away. You started to receive your spouse’s pension. You are now required to file a tax return but you did not know it.
Reason 7: Hardship
- You can show that there would be substantial financial loss if you paid your taxes.
- You filed bankruptcy when the taxes were due.
What if I don’t have reasonable cause for penalty relief, can anything be done to remove my penalties? If you do not qualify for normal IRS Tax Penalty Abatement because you do not have a good reason for filing or paying taxes late. You may qualify for First-Time IRS Tax Penalty Abatement. This type of IRS Tax Penalty Relief is for individuals that have filed and paid their taxes on time for the past 3 years.
Every tax case is different, but EVERY case has a solution. We can help you figure out the best program to settle your tax debt, click below for a free consultation with a professional that can guide you to the correct solution.
The IRS will not forget about you or your tax debt, it will only increase the pressure to collect! Penalty Abatement can be a life saving solution for your tax debt, but you may also qualify for more desirable options like Offer In Compromise, which can reduce not only the penalties but the tax debt itself or be placed in Currently Not Collectible Status to defer payment time.