Failure to File Penalty
The failure-to-file penalty is calculated based on the time from the deadline of your tax return to the date the return is actually filed. The penalty is 5% for each month or part of the month that the tax return is late, up to a total maximum penalty of 25%.
Failure to Pay Penalty
The failure-to-pay penalty is calculated based on the amount of tax you owe. The penalty is 0.5% for each month the tax is not paid in full.
Accuracy Related Penalties
An accuracy-related penalty of 20% applies to any underpayment due to:
- Negligence or disregard of rules or regulations, or
- Substantial understatement of income tax.
The most common form of penalty relief is through “Reasonable Cause”. If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause.” Essentially, this means something beyond the control of the taxpayer has occurred that has caused you not to file or pay your taxes timely. It also must be demonstrated that you (the taxpayer) took reasonable steps to “counter” the events and were still unable to pay and or file timely.
Common Items the IRS Considers as Reasonable Cause
- Serious Illness
- Death of family member
- Incorrect Advice from a competent tax professional
- Incorrect advice directly from the IRS
- Fire, Casualty, Natural Disaster, Other Disturbance
- Acts of God
- Major family problems
- Theft or destruction of your records
- Major disruption to your life
IRS Guidelines for Deciding When to Abate Penalties:
- What are the events that happened, when did it happen, and why did these events prevent you from complying with the tax law?
- How were your other affairs handled during this time? Did you single out the IRS not to be but paid other creditors? What steps were taken to try and mitigate your circumstances?
- Is there a direct “timeline” correlation between what happened and the taxes being filed late or not paid?
- Is there a history of filing and or paying late? Repeat offenders, have a tougher job convincing the IRS that this was not intentional.
- Were the circumstances “beyond the control of the taxpayer” truly unavoidable, and could not be anticipated? If so, this generally establishes reasonable cause.
Submitting a Penalty Abatement Request
A written request should be made to the IRS. Typically, the request will be made with a formally structured letter with an introduction, explaining the reasons why abatement is appropriate. Provide as much proof of what you are arguing as possible and include as much detail as possible. Specific facts and information, answering the above questions is helpful. The more “third party” evidence you produce the better the chances for relief.
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