Penalties and Interest fees are devastating. More than punishment, these outlandish fees are a lucrative source of income for the IRS. If you want to keep your finances from being swallowed by ever-increasing tax debt, know your enemy- the dreaded IRS Penalties.
The Penalty Box:
Stop the Bleeding:
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. It can be as high as 1% per month on the balance due.
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.
Apply for Penalty Abatement.
Penalties will grow unless you stop them or pay the debt in full. 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.
- 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. If you owe taxes for more than a couple of years, the IRS will likely ignore your request. Why? Because they will suspect that your tax debt has more to do with you not making an effort to play by the rules, than the reason you are giving them. Also remember, the penalty abatement review process is very subjective. A perfectly reasonable request may be turned down, simply because the IRS agent reviewing it had a bad day. In this case, you may want to send another request. Just make sure you have a tax resolution in place, so you aren't left vulnerable to collections.
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
Convincing the IRS that you need Penalty Abatement is incredibly difficult, even for the professionals! Now you know if you qualify for it, don't let a fast-talking Tax Resolution company take you down that road if you don't qualify, or it will cost you.