Have you ever heard the late night commercials where the person says that they can remove all of your IRS penalties? We often get taxpayers who come into our Richardson, TX office have hard the commercials, and they want to know how they can have all of their penalties removed. The reality is in some cases, it is possible, but it depends on your situation. Today, I’ll give an overview of tax penalties and a quick discussion on penalty relief. In the next week, we’ll cover the topics in more depth.
Unfortunately, the IRS does not simply remove penalties as a matter of procedure. From the government’s perspective, there are legitimate reasons for penalties. The IRS lists several purposes of penalties in the Internal Revenue Manual (IRM). One purpose of penalties is to encourage timely compliance. If the IRS does not enforce penalties, taxpayers are less likely to comply on a timely basis on their own. Another reason is that it helps to compensate the government for the resources to deal with non-compliant taxpayers.
Penalties Assessed by the IRS Include –
- Failure to File Penalty – 5% per month up to 25% of Tax Liability
- Failure to Pay Penalty - .5% up to 25% of Tax Liability
- Accuracy Penalty – 20% of additional amounts assessed
- Civil Fraud Penalty – 75% of additional amounts assessed
- Not a penalty but penalties also accrue Interest
What are some actions that you can take to seek Penalty Relief?
- First Time Penalty Abatement - Must have 3 years prior clean of penalties (even if paid the penalty at time of filing). Can call the IRS to get the abatement or file a claim using IRS Form 843 (one for each year).
- Showing Reasonable Cause – The Taxpayer must be able to show that they attempted comply with the IRS compliance issue, but were unable, due to reasons beyond their control.
- If you are under IRS exam, can do it in appeals. For example, let’s say you are being audited due to the IRS’s contention that you took business expenses for what they consider a hobby. However, you truly incurred expenses and took the deduction in good faith. Even if you lose the related to the hobby vs. business question, if you acted in good faith, you may be able to negotiate an abatement of the penalties.
Do You Need Help?