The IRS has some standard tax penalties. If you ignore them, they can stack up quickly. The good news is that there are several ways you may be able to get the IRS to waive all or part of the penalties.
First, let’s look at the most common IRS tax penalties.
Failure to File Penalty
If you don’t file your return or file it on time, you are subject to a penalty of 5% of the unpaid taxes for each month that the return is late. Even worse, the penalty starts the day after the returns are due. It does cap at a maximum of 25 percent of your unpaid taxes.
Plus, if your return is filed more than 60 days after thedeadline, it is also subject to a minimum late filing penalty that is the lesser of either 100 percent of the tax required to be shown on the return that was not paid on time, or a specified dollar amount that has been set by the IRS. (That’s announced each year)
Avoid the failure to file penalty by filing your return, even if you can’t pay your taxes right now.
Failure to pay
Right along with the failure to file penalty is the failure to pay penalty. If you don’t pay your taxes by 4/15/2020, the penalty is 0.5% of taxes each month. If you file for an extension, you don’t need to file right away, but 90% of the taxes are still due to be paid by the 4/15/2020 deadline.
At 0.5% per month, that comes to 6% per year. Compare that to a credit card rate, and that’s pretty cheap money. I have clients who purposely underpay taxes so they can use the money in their businesses. There is a day of reckoning, of course, when you need to catch that up.
Failure to pay sufficient estimated tax
This penalty applies to people who did not pay a sufficient amount in taxes throughout the year.
According to the IRS, penalties are calculated separately for each required installment, based on the number of days late, multiplied by the effective interest rate for the installment period. The penalty is applied to what you should have paid.
It gets complicated, though, when you have ownership in pass-through entities such as an S Corporation or a partnership. You may not receive any distributions until the end of the year so you don’t have cash to pay estimated taxes. You may not even know if there will be income that will be attributable to you. The IRS does allow you to adjust the calculation for estimated tax penalty, though, to account for such things.
How to Get Your Penalties Waived
The IRS will consider any sound reason for failing to file a tax return, make a deposit, or pay tax when due. If they accept those, they may waive all or part of the penalty. The IRS’s definition of “sound reason” includes:
Fire, casualty, or natural disaster,
Inability to obtain records, Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family, or
Any other reason which establishes that you used all ordinary business care.
You do need to have facts that substantiate your claim for reasonable cause for not filing or paying on time. This would include explaining what happened and when it happened. Why did this prevent you from filing your return or paying on time? Once your circumstances changed, what actions did you take to file and/or pay your taxes?
Another option for tax waiver is under the “first time penalty abatement” rule. These are usually applicable for businesses. You may qualify if the following are true:
There are strategies for combining penalties from multiple years to get a waiver of all or most of them. This is where you need a sophisticated and experienced tax professional helping you.
If you need help with tax filings or tax negotiations, please give us a call. We have experienced experts in our group who have proven track records working with cases just like yours.