The Internal Revenue Service (IRS) wants to encourage citizens and businesses to file and pay their taxes on time. In the fiscal year 2020, the IRS assessed more than $14 billion in civil tax fines for individual, estate, and trust tax returns. Fortunately, there are several ways to reduce or waive IRS penalties if you comply.
The most common IRS penalties
The Internal Revenue Code contains over 150 different criminal provisions; depending on the amount of the IRS fine, financial penalties or forfeiture of property may be imposed. With respect to criminal penalties, jail time is available. Among the most common penalties are.
Failure to File (FTF)
The penalty for failure to file a return depends on how late the return was filed and the amount due on the original filing date; for returns filed more than 60 days late, the minimum FTF penalty is $435 (for 2020 returns) or 100% of the tax due on the return %, whichever is less. For each month of late filing, the tax fines is estimated at 5% of the unpaid tax; the maximum fine is reached after five months and cannot exceed 25% of the unpaid tax.
Failure to pay (FTP)
Unreported or unnotified taxes may be subject to penalties. The penalty for non-payment is 0.5% of the amount of tax due for each month of non-payment. The penalty is increased to 1% per month if a notice of intent to pay tax is received but payment is not made. The maximum penalty is 25% of the amount of unpaid tax; if both FTF and FTP penalties are applied in the same month, the sum of the two penalties may not exceed 5% of the amount of unpaid tax per month.
Sanctions related to inaccuracies
The IRS may impose a penalty equal to 20% of the amount of tax overpaid because of your specific behavior. These include negligence, failure to follow the rules (negligently, recklessly, or intentionally), failure to pay income tax, and tax errors.
Failure to Deposit (FTD)
Employers who fail to remit payroll taxes on time, in the correct amount, or in the correct order are subject to a fine if they fail to pay the tax. The amount of the tax fines range from 2% to 15% of the unpaid deposit.
Failure to Pay Estimated Tax
If you have not paid the full amount of tax withheld or assessed for the year, you may be subject to a fine. Unlike other penalties, there is no percentage or fixed amount. The IRS calculates the amount of the penalty based on the total amount of tax overpaid and the tax rate for a given period (which varies each quarter).
Keep in mind that the IRS also charges penalty interest. In some cases, this can significantly increase the amount owed.
Can I get the interest reduced or waived?
Generally, the IRS will only reduce or waive interest charges if the penalty is waived or reduced. In very rare cases, the IRS may cancel interest due to negligent errors or delays. However, a payment plan from the IRS is a reliable way to reduce interest. If the plan is approved, the IRS can cut the penalty for nonpayment in half and reduce the interest due.
IRS Penalty Reduction
A reduction or waiver of tax penalties is possible, but by no means guaranteed. The IRS offers three types of penalty reductions.
Good Reason
The IRS may waive FTF, FTP, and FTD penalties if you can prove that you have a good reason for not meeting your tax obligations. Examples include death, serious illness, natural disaster or lack of documentation. If you are applying for an exemption from this type of penalty, you must state the facts and provide sufficient evidence to support your claim.
If the penalty is waived for the first time
You can apply for a first-time penalty waiver (also known as an administrative waiver) if all of the following apply
- You have not filed any tax returns or been fined in the three tax years prior to the year in which you received the penalty.
- Filed all required tax returns or received an extension of time to file.
- Paid all taxes owed or took steps to pay them.
You may also apply for a waiver of the administrative penalty if you received false oral information from the Internal Revenue Service. Please note that FTP penalties are applied until the tax is paid in full. Therefore, if this is the first time you are applying for a penalty waiver, it is advisable to wait until the balance sheet is complete.
Read: How Do I Request A Settlement Offer From The IRS?
Legal Exceptions
If you receive an erroneously written notice from the tax authorities, you may be eligible for a statutory exemption. To claim this type of relief, you must file IRS Form 843, Request for Refund, and Request for Write-off.
In the case of penalties for underpayment of estimated taxes, the fee may be waived if at least one of the following conditions is met
- you did not pay any taxes in the previous year
- you did not pay taxes due to a natural disaster, accident, or other extraordinary events
- retired at age 62 or older during the current tax year
- persons who became unable to work in the previous or current tax year.
- If you fall within the tax-free safe harbor.
The safe harbor rule applies if you have paid more than 90% of your total taxes for the current tax year or 100% of your total taxes for the previous tax year, or if your tax liability is less than $1,000. If your adjusted gross income (AGI) is $75,000 or more ($150,000 or more for married people filing taxes together), you may not have to pay a penalty if you have paid the lesser of 90% of your current year’s tax liability or 110% of your previous year’s tax liability.
Useful information
Choose the penalty waiver that best suits your situation and be sure to communicate in the most appropriate manner. If you are applying for a penalty waiver for the first time, it is best to apply directly to the tax authorities. However, written requests are most appropriate if you are seeking remission for a valid reason.
Unfortunately, the taxing authority is notorious for losing requests for penalty cancellation. Be sure to follow up on your penalty cancellation request by calling the Internal Revenue Service. If it hasn’t been filed, submit it as soon as possible. Also, request that your account be frozen while the request is being processed.
Initial requests for tax fines are generally processed within two to three months but may take longer if the request for tax fines is based on a legitimate reason. If an appeal is filed, you may have to wait up to a year for a final decision.
About Author
Villie Walters Ramirez is a 32-year-old tax assistant at an NYC Tax Audit Firm who enjoys accounting, bookkeeping, and tax preparation. She has a post-graduate degree in accounting, and she has a severe phobia of cats. She enjoys traveling A lot.
