You made a mistake. You missed a deadline or had a math error on your return. Perhaps you forgot to report certain income or chose a deduction you didn’t qualify for. Perhaps this year was simply too much, and taxes were the last thing on your mind – leading you to miss Tax Day and incur a penalty for late filing and payment. We’re only human, and mistakes happen. That is why the IRS offers taxpayers the chance to seek relief for penalties (and interest) accrued on their tax accounts because of their mistakes, provided they qualify for IRS penalty abatement.
What Is IRS Penalty Abatement?
Certain circumstances allow indebted taxpayers to qualify for penalty abatement, eliminating or reducing all penalties and interest applied to their tax debt. Penalty abatement does not eliminate your debt, however. If the IRS has assessed your taxes and found you to owe them money, that money must still be paid as soon as possible.
But the penalties and interest added on top may be avoided through penalty relief. It’s important to note that the IRS does not often abate taxpayer penalties – but that may be because penalty abatement is something you must actively appeal for, and most taxpayers don’t bother. For the most part, you are precluded from penalty abatement if:
- You’ve failed to file a return or have had a previous penalty imposed on your tax account in the last three years before this penalty.
- You haven’t yet filed all required returns or filed any applicable extensions.
- You haven’t paid or arranged to pay (via installment agreement) your due tax.
What Penalties Are the IRS Rescinding?
The IRS can penalize a taxpayer in over a hundred different ways, but the vast majority of taxpayer penalties can be summarized as:
- Penalties on inaccurate or missing information returns.
- Penalties for failing to file a tax return before the due date (without asking for an extension).
- Penalties for failing to pay a tax debt before the due date.
- Penalties for failing to deposit employment taxes and payroll taxes for a business.
- Penalties for inaccurate income reporting.
- Penalties for dishonored checks on estimated tax payments or monthly installments.
- Penalties for underpaying your estimated taxes.
Of these, the three most significant penalties are:
- The failure to file a penalty (accounting for 56 percent of all penalties).
- The failure to pay penalty (accounting for 14 percent of all penalties).
- The failure to deposit penalty (for businesses or individuals in charge of payroll and employment taxes, accounting for 4 percent of all penalties).
Each penalty has its way of calculating what is owed in addition to the initial debt. The penalty for failing to file, for example, is a whopping 5 percent of the total assessed tax debt per month before interest. Failure to pay your debt on time raises your debt by 0.5 percent per month.
Individually, these penalties reach a limit of 25 percent (in five months and 50 months, respectively). However, they are also additive, although the failure to file penalty is reduced to 4.5 percent if the failure to pay penalty is added, for a total of 47.5 percent penalty (25 percent and 22.5 percent) after 50 months.
Information return inaccuracies are penalized by $50 to $580, depending on the charge (such as filing late or intentional disregard). The penalty for the failure to deposit, for example, is two percent of the unpaid deposit in the first five days and up to 15 percent after more than ten days. Other penalties are a flat amount (such as a few hundred dollars) or a per-offense penalty.
What About Interest?
The IRS charges interest on all penalties and debts. And it is a steep interest rate. The IRS charges a flat 3 percent in addition to a variable rate that changes every quarter. The IRS Newswire reports on IRS interest rates and other matters.
When Does the IRS Offer Penalty Abatement?
There are different forms of penalty abatement. You may want to contact a tax professional and consult them to ensure that you do or do not qualify for tax debt penalty relief. First-time penalty abatement is not solely for first-time offenders. If you have had trouble with the IRS in the past, but it was years and years prior, you may still qualify for penalty abatement this time. In general, you need to:
- Be up to date with all your tax returns.
- Have no late or missing returns in the last three years and no other penalties.
- Have you paid off your tax debt, or are you in the middle of doing so via a payment plan.
The IRS may also provide penalty relief whenever there is reasonable cause. The key phrase for likely cause is “unforeseen circumstances outside their control.” for example, the IRS may relieve your penalty if you couldn’t file a tax return because you were in the middle of a natural catastrophe.
If you have documented evidence of the IRS providing misleading or false advice, you may seek administrative relief because of an IRS error. However, this can be difficult to argue and challenging to document. If your penalty was the result of your spouse’s doing and affects you because they do your taxes or your taxes are filed jointly, you can request innocent spouse relief.
You may request penalty abatement after paying your tax debt. It is usually in your best interest to do so because the IRS can continue to charge penalties and interest on your tax debt while it is being paid off, even if they’ve abated the other penalties. Waiting until your debt is paid means getting the chance to have all penalties reversed in the form of a tax refund.
The IRS is a powerful creditor, and they charge steep interest rates. IRS tax penalties can range from minuscule to severe. Yet regardless of how minor or significant your debt has become, dealing with it as soon as possible is always in your best interest. Working with a tax professional may improve your outcome, leading to faster results, better resolutions, and even total penalty abatement.