Penalty Abatement

    ABATING PENALTIES

    Not only is the average family paying tax on their income, in the form of the income and payroll tax, but it is also paying sales tax, the cost of the tax that companies embed into the cost of their goods, death tax, capital gains tax and then LARGE penalties and interest if they make a mistake.   Fortunately there is at least some relief that can be had from penalties if the reason that caused the penalty amounts to what the IRS considers a “reasonable cause”.

    WHAT ARE THEY?

    The IRS has the authority to slap you with a number of different penalties for failure to toe the line. They exist in order to “encourage voluntary compliance”.

    There are now more than 150 different penalties, ranging from one-half  percent per month for paying late to 75% for fraud.  Multiple penalties are common.

    Some of the more common penalties are as follows:

    The Failure to File the Return Penalty

    The penalty for the failure to file is 5% of the tax not paid by the due date for each month not filed.  For a total of up to 25% of the tax debt.

    Substantial Understatement of Income Tax

    For an individual, there is a substantial understatement if the understatement of tax exceeds the greater of 10% of the correct tax or $5000.00

    Information Reporting Penalty

    If you don’t file or file an incomplete return you are subject to a penalty.

    Failure to Pay Penalty

    A penalty of 1/2 of 1% of the unpaid tax is assessed for each month after the due date that the tax is not paid up to 25% of the unpaid tax. The failure to pay and the failure to file penalties can be combine and interest is added to the penalties and the underlying tax.

    Frivolous Return Penalty

    $500 bucks is assessed if there is not enough information to calculate the return based on a frivolous position, or a desire to delay or interfere.

    Accuracy Related Penalty

    An accuracy related penalty of 20% applies to any underpayment of the tax as a result of negligence or substantial understatement of the tax.

    There are a number of others as well. The IRS attaches interest on these penalties and before long the amount that you owe is often double or triple the original balance.

    GETTING RID OF THEM – The penalty abatement request

    Thankfully the Internal Revenue Manual contains directions and guidelines for determining the “reasonable cause” necessary that might warrant abating or forgiving the penalty.  They may include things such as:

    - forgetfulness

    - ignorance of the law

    - death, serious illness or unavoidable absence

    - inability to obtain records

    - A mistake made despite ordinary business care and prudence

    - inability to obtain tax forms

    - bad tax adviser advice

    These are reasonable cause areas as defined by the IRS, not automatic loopholes out of a tax penalty.

    In my experience, your excuse must be very believable.  You cannot claim that you were ill for two years which made you incapable of filing, but then continue to not file after the illness cleared up.  You will lose your request for abatement.

    If you wish to talk to me about your penalty,  make the online appointment and I will call you to discuss it over the phone.