The IRS issues penalties for several different reasons, including owing taxes. Yes, the IRS will penalize you for a failure to pay your taxes via an IRS penalty abatement and can even continue to punish you if you continue to stall. But the IRS can also penalize you for failing to file your tax returns. It can penalize you for failing to pay employment taxes for your employees.
It can penalize you for depositing the wrong amount when paying your taxes. In addition to other tax debts and interest rates, these penalties can quickly rack up. These penalties can turn a minor missed payment into a headache or worse. Your options for dealing with mounting IRS penalties are as follows: pay your debts as soon as possible or seek abatement.
What Is IRS Penalty Abatement?
Penalty abatement comes in the form of an administrative waiver from the IRS, effectively deleting a portion of your tax debt and sometimes drastically reducing the amount you owe. Not all forms of penalty abatement are created equal – circumstances and qualifications must be considered.
For the average taxpayer, your chance at reduction will likely come through a first-time penalty abatement waiver. This waiver is an administrative waiver generally granted under the following conditions:
- You have had no other offenses against the IRS in the last three years.
- You have been up-to-date and timely with all your returns and payments in the previous three years.
- You are currently up to date with your payments and returns.
The way first-time penalty abatement works is simple – if you have not been in hot water with the IRS for at least three years and made your first tax mistake this year – such as missing a deadline for a tax payment – you can consider appealing for first-time penalty abatement. It does not matter if you made a similar mistake in 2005; the IRS only worries about the last few years.
Not all IRS penalties are subject to first-time penalty abatement. Instead, your liability is eligible if it is a failure to file a sentence, a failure to pay a fine, and a failure to deposit a penalty. Suppose you are in charge of making payroll tax payments on behalf of your company and your employees, for example, and fail to deposit the money needed for those payments on time. In that case, you may be liable for that money and a penalty.
Understanding IRS Penalties
The IRS charges dozens and dozens of different kinds of penalties, but only a few of them are worth mentioning. For one, the vast majority of all penalties levied by the IRS towards taxpayers are either a failure to file (14 percent of all cases) penalty or a failure to pay (56 percent of all cases) penalty. Other types of penalties that the IRS charges which are eligible for some penalty abatement include:
- An information return penalty.
- Accuracy-related penalties.
- A dishonored (bounced) check penalty.
- Underpayment of an estimated tax penalty.
- Failure to deposit penalty.
What to Do If You Have Received an IRS Penalty
First and foremost – do not panic! If the IRS has informed you that they are charging a penalty, they will tell you precisely what that penalty entails. For example, a penalty for failing to file on time is 5 percent of your monthly principal tax debt (starting at 5 percent on day one), for a maximum of 25 percent.
Other penalties are a flat fee depending on the severity of the offense, with a range of penalties for different levels. Your chance for penalty abatement only exists before you pay your penalty. That is right – if you want to seek reduction, you must do so quickly. Before you do anything else, you need to contact a tax professional. Here is what you need to keep in mind:
Do Not Wait
While you shouldn’t rush to pay your penalties before thinking things through, do not wait around and do nothing, either. Contact a tax professional, explain your situation, and figure out your options. You may or may not be eligible for a form of penalty abatement, including first-time penalty abatement.
Do Not Pay Your Penalty Immediately
If you decide to begin paying your penalty, you cannot turn around and ask the IRS for your money back. Take a moment to breathe and consider if you might be eligible for a reduction.
Ask About Penalty Abatement
Penalty abatement usually comes in four variants, including first-time penalty abatement. The other three are:
- Statutory exceptions. Improperly omitted items from your tax return are part of a joint return, and you did not know the error. If you couldn’t fulfill your obligation as a taxpayer due to extenuating circumstances – such as a natural disaster or being a soldier in an active combat zone at the time of your deadline – the IRS will generally lift your penalty. Another example of a statutory exception would be innocent spouse relief, which may omit you from the consequences of an improperly filed return.
- IRS error. This one can be difficult to prove, but it happens. The IRS is an agency of humans, and we all make mistakes. However, you need pretty hard evidence that the IRS made a mistake with your tax account that led to the penalty in the first place for this form of reduction to stick.
- Reasonable cause. In addition to natural disasters, other extenuating circumstances might explain why you were late with a payment or made a mistake with your tax return, such as a software error. However, this cannot be easy to prove as well. Not only do you need to show that your tax preparation service failed you, but you need to demonstrate that you “exercised ordinary prudence” but weren’t able to comply with the IRS’ order to file or pay.
Like any other IRS decision, you are also within your rights if you choose to appeal the IRS’ decision to levy a penalty against your tax account. However, this is only an option if you are convinced that the IRS penalized you in error and have the means to defend that position.
Consider Legal Help
Whether you decide to pursue first-time penalty abatement or seek another form of tax penalty abatement, professional help is highly recommended. Navigating the IRS’s requirements and decisions can be hard enough as it is, but legal representation is doubly important if you intend to contest the IRS’s claims.