Penalty Reasons
If you don’t meet your tax obligations, you might owe a penalty. The IRS charges penalties for various reasons, including if you:
– Don’t file your tax return on time
– Don’t pay your taxes on time and correctly
– Don’t prepare an accurate tax return
– Fail to provide accurate and timely information return
How you know you owe a penalty
When you owe a penalty, the IRS will send you a notice or letter explaining the reason for the charge and what to do next. Verify the information in the notice or letter. If you resolve the issue, the penalty might not apply.
Filing or paying your taxes late can hit you with penalties from the IRS
Types of Penalties
Here are some common IRS penalties
- For not filing or providing required information returns or payee statements on time.
- For not filing your tax return by the due date.
- For not paying your taxes by the due date.
- For not reporting all your income or claiming deductions or credits you don’t qualify for.
- For submitting a claim for a refund or credit for an excessive amount without reasonable cause.
- For not paying employment taxes accurately or on time.
- For tax preparers who engage in misconduct.
- For payments that your bank doesn’t honor.
- For not paying estimated tax accurately or on time for a corporation.
- For not paying estimated tax accurately or on time as an individual.
- For not reporting foreign financial activities on time and correctly
How to waive IRS tax penalties
Types of penalties the IRS assesses:
- Late filing penalty: this occurs if you don’t file your tax return by the due date, typically April 15 for individuals and March 15 for partnerships or corporations. Filing an extension can avoid this penalty, giving you six additional months.
- Late payment penalty: this penalty is for not paying your taxes on time. An extension to file does not extend the time to pay your taxes, which catches many off guard.
- Underpayment penalty: if you expect to owe $1,000 or more when filing your tax return, you’re required to make estimated tax payments quarterly. Failure to do so results in this penalty.
To address these penalties, here are three approaches:
- First-time penalty abatement: The IRS offers a first-time penalty abatement waiver, which you can request by simply calling the number on your notice. This is usually granted if you have a good filing history over the past three years.
- Form 843 – reasonable cause abatement: if the first abatement doesn’t apply, you can file Form 843 for penalty abatement due to reasonable causes like IRS errors, bad advice from the IRS, or other acceptable reasons such as serious illness, natural disasters, or financial hardship. (see page 5)
- Negotiating with the IRS: if other methods fail, consider an Offer in Compromise to settle your debt for less than the full amount, or a Partial Payment Installment Agreement, which allows you to pay off your debt in smaller, more manageable amounts.
Different penalties for individuals and LLCs
- Individuals: penalties often include failure to file, failure to pay, accuracy-related penalties, and underpayment of estimated tax.
- LLCs: additional penalties can include failure to deposit employment taxes, late filing of information returns, and incorrect reporting of international financial activities
Interest on a penalty
The IRS charges interest on penalties, which increases the amount you owe until the balance is paid in full. The start date for interest charges varies by penalty type. If you need to calculate your IRS penalty and interest use this calculator
Removing or reducing a penalty
The IRS may remove or reduce some penalties if you acted in good faith and can show reasonable cause for not meeting your tax obligations. However, they cannot remove or reduce interest unless the penalty is removed or reduced. Examples include natural disasters, medical emergencies, or other situations beyond your control
Disputing a penalty
If you disagree with a penalty, you can dispute it by calling the toll-free number on your notice or letter or writing a letter explaining why the penalty should be reconsidered. Include the notice, the penalty you’re disputing, and your explanation.
Avoiding Penalties
To avoid penalties, file accurate returns, pay your taxes by the due date, and submit any required information returns on time. If you can’t meet these deadlines, apply for an extension of time to file or set up a payment plan. An extension gives you more time to file but not to pay. A payment plan helps you pay over time and may reduce future penalties. If you believe you qualify for penalty abatement, it’s crucial to act quickly. Speak with one of our tax professionals at Taxfully who can guide you through the process and ensure that all necessary documentation is in place
