The Penalty Box:
Accuracy Penalties: The IRS can add a 20% penalty if they find you understated your income tax liability.
Fraud Penalties: If you fraudulently under-report your income the penalty is 75% of the under-reported amount.
Failure to Pay Taxes Penalties: This penalty starts on April 16 for the unpaid amount. Half a percent is added on for every day the debt goes unpaid.
Late Filing of Return Penalties: The IRS can impose a penalty of 5% per month based on the the tax balance due, up to 25% total.
Stop the Bleeding: Apply for Penalty Abatement.
Penalties will grow unless you stop them. If you apply for Penalty Abatement you can stop the penalties and reduce your debt by thousands of dollars. But first, you have to qualify.
Qualifications- Reasonable Cause for Not Paying Penalties
- Serious illness of you or a family member.
- Unavoidable absence
- Business Records destroyed (by fire or other cause)
- Taxpayer's ability to make deposits or payments impaired by civil disturbances
- Lack of funds applies, but only when you can prove lack of funds occurred despite exercising ordinary business prudence.
Other explanations may be acceptable, but you have to prove you exercised ordinary business care.
Fight Back: How to request Penalty Abatement.
- Fill out IRS form 843, “Claim for Refund or Request for Abatement.”
- Include copies of documents that prove your case
- Make copies of any letter you send to the IRS
Warning: Assuming you jump the first hurdle by qualifying, winning in the penalty abatement game is tough. Make sure you provide plenty of supporting documentation to prove your case if you hope to win. And remember, you might reduce or eliminate the penalties on your debt, but you still have to pay the taxes owed!