Tax Penalties

Things don’t always go as we plan when it comes to filing and paying taxes on time. Early preparation can certainly eliminate surprises that are often responsible for late filings and late payments. In fact, late filings and payments are two of the most common infractions that IRS agents assess. Therefore, two of the most common tax penalties that the IRS imposes on taxpayers are the failure-to-file and failure-to-pay penalties.

They generally apply the failure-to-file penalty when the taxpayer doesn’t file their return by the annual tax deadline. The deadline may be the standard tax due date, which is on or around April 15 every year. Sometimes, the deadline is later if the IRS granted the taxpayer an extension.

The IRS imposes a failure-to-pay penalty if the taxpayer doesn’t pay their total tax debt by the deadline. It’s important to differentiate these actions. Regardless of the date on which you file your tax return, the IRS expects you to pay your taxes by the original tax deadline. In other words, while the IRS is willing to grant filing extensions, no extensions are available for paying your taxes.

Calculation Formulas for Tax Penalties

Failure-to-File Penalty

The failure-to-file penalty is five percent of the tax due at the deadline. This may be reduced by the failure-to-pay penalty amount for each month in which both penalties apply.

Markedly, the IRS charges this dollar amount every month, even if you file your return less than 30 days late. The IRS explains further, saying “If any unpaid tax was required to be reported, a minimum penalty applies to income tax returns received 60 or more days late.” The minimum penalty is the lesser of the unpaid tax or a fixed rate, which depends on the year that the filing was due.

The Failure-to-Pay Penalty

To begin with, the failure-to-pay penalty is calculated differently. The IRS imposes .5 percent of tax due on the deadline. However, it can decrease to .25 if the taxpayer filed the return on time as long as the taxpayer is an individual.

If the taxpayer doesn’t pay the full liability within ten days of receiving the notice from the IRS, the penalty increases to one percent. In addition, this penalty is incurred repeatedly on a monthly basis. That is, until you pay off the debt completely or the penalty reaches 25 percent.

The IRS also imposes the failure-to-pay penalty on tax that the taxpayer didn’t report on the original return. In other words, if you file an amended return that results in an additional tax liability, the IRS will assess a penalty for paying the resulting tax late. If he or she doesn’t pay the previously unreported tax in full within 21 days of the date on the notice, the IRS will impose a fine of:

  • .5 percent of the unpaid tax on the due date printed on the notice
  • .25 percent during a mutually approved installment agreement if an individual taxpayer filed by the deadline, or
  • one percent if the tax isn’t paid within 10 days of the notice.

This penalty is also a recurring charge until the taxpayer pays the debt completely. The IRS gives taxpayers, with back-tax debt over $100,000, 10 days to pay in full. These significant penalties often make it more challenging to pay off back-tax debt. The good news is this; you may have other options.

Tax Penalties and Penalty Abatements

Overall, the IRS imposes penalties on taxpayers who don’t pay their entire tax bill on time. In a perfect world, no one would find themselves in the position of having to pay at tax time. Although we don’t live in a perfect world just yet, the IRS extends a level of forgiveness that allows for unforeseen circumstances.

For that reason, talk to a tax professional about the obstacles you experienced that kept you from paying your tax bill on time. After gaining a thorough understanding of your challenges, he or she will determine your eligibility for a penalty abatement and other programs.

A penalty abatement generally removes the penalty from your back-tax debt if you qualify. Several factors may apply to program requirements so be sure to disclose all detailed information to your tax professional. Details certainly help the professional maximize the opportunity to achieve an abatement for you.

The IRS grants many abatements as a one-time courtesy. They’re often determined by the negotiations between you – or a tax representative on your behalf and the IRS agent.

First Time Abatement for Tax Penalties

The American Institute of Certified Public Accountants (AICPA) explains that the IRS sometimes approves an administrative waiver of many tax penalties. To request this abatement on your own, you may submit a written request to the IRS, if you meet the criteria set out by them.

According the AICPA, here’s how you can qualify for the waiver:

  • File all your returns that are due or past-due,
  • Pay your outstanding balance or establish a payment agreement with the IRS, and
  • Have no prior penalties (except for estimated tax penalty) for the previous three years.

The AICPA also notes that “if the taxpayer received reasonable cause relief in the past, they are still eligible for the [first time abatement].”

Finally, they point out some further important considerations:

  • The first-time abatement is for one tax year. When more than one tax year qualifies you for this waiver, it’ll be applied to the earliest qualifying tax year.
  • If the IRS hasn’t assessed an impending penalty yet, the taxpayer may submit a penalty nonassertion request.
  • If the taxpayer has already paid the penalty, they may request a refund by filing Form 843. The title of this form is Claim for Refund and Request for Abatement.
  • The taxpayer may file an appeal if the IRS doesn’t grant a first-time abatement. Although, many taxpayers opt for professional help to file an appeal. The taxpayer should choose the avenue he or she is most comfortable with.
  • Taxpayers can save thousands of dollars on penalties if they or their trusted tax relief professionals advocate for a penalty abatement.

Help with Tax Penalty Relief

The IRS offers several programs and waivers for eligible taxpayers that can significantly reduce or dissolve these penalties. Consult a tax relief professional to determine the best strategy for reducing your tax debt and establishing an affordable installment agreement that will halt current and future collection efforts.

The staff at Tax Champions has over 35 years of experience in negotiating the lowest balance on the program that’s right for you. Give us a call today for an informational discussion about your circumstances. By the end of the call, you’ll have a better idea of what options you have, as well as what it’ll take to get you back into compliance with the IRS.

The Tax Champions Experience

Our trusted tax services have helped people out of their tax debt and into compliance with the IRS for decades. Consequently, our reputation is reflected in our A+ rating at the Better Business Bureau with no customer complaints. In fact, we have no complaints filed with the IRS nor the Board of Accountancy. Learn more about our client experience here.

We’re on your side and strive to make the process as easy as possible. We’re available evenings and weekends in addition to standard business hours for your convenience. We look forward to hearing from you.

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[1] Collection Procedural Questions 3. (2019, March 8). Retrieved from //www.irs.gov/faqs/irs-procedures/collection-procedural-questions/collection-procedural-questions-3

[2] IRS First-Time Penalty Abatement. (2018, August 2). Retrieved from //www.aicpa.org/interestareas/tax/resources/irsprocedureadministration/irspenaltyabatement.html

[3] Understanding Penalties and Interest. (2019, March 28). Retrieved from //www.irs.gov/businesses/small-businesses-self-employed/understanding-penalties-and-interest

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Walter Wotman, CPA

Founder & Managing Partner

Walter Wotman's Tax Champions authored this helpful Guide to IRS Tax Resolution for American taxpayers. He is one of America's most experienced tax negotiators with over 35 years of experience helping thousands of clients settle difficult back tax issues.

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