The IRS imposes tax penalties for a variety of reasons including failure to meet a filing deadline, failure to pay a tax balance due, failure to make required estimated tax payments and submission of an inaccurate tax return. Since all of these penalties were created for the purpose of enforcing tax compliance, they are normally waived only when a taxpayer can document certain extenuating circumstances that have resulted in a deviation from the tax code. Listed below are some of the common tax penalties handed down by the IRS together with some suggested procedures for obtaining a penalty waiver.
Failure to File Penalty
· Tax Consequences: Any taxpayer who does not file a completed tax return or a request for a tax extension by the IRS filing deadline will be assessed a Failure to File Penalty equal to 5% of the tax balance owed for each month or partial month that the return is late. This penalty can accrue up to a maximum of 25% of the unpaid tax balance. In addition, any person who fails to submit a tax return within 60 days of the IRS filing deadline will be assessed a minimum penalty of $135 or 100% of the tax balance owed, whichever is less.
· Penalty Abatement Procedures: The IRS will normally negate the Failure to File Penalty for any taxpayer who has had a clean filing and paying history for the previous three years. A penalty waiver may also be granted when the taxpayer can document certain specific conditions that may have resulted in the tax return not being submitted by the filing deadline. Such conditions, which are collectively labeled as Reasonable Cause Relief, include such events and circumstances as death, a serious illness, a natural disaster, the inability to secure necessary tax information or faulty advice from the IRS or a tax professional.
Failure to Pay Penalty
· Tax Consequences: A taxpayer who submits a tax return but does not pay the full balance of the taxes owed will be assessed a Failure to Pay Penalty of 0.5% of the tax amount due for each month or partial month that the taxes remain unpaid. This penalty can accrue up to a maximum of 25% of original back tax balance. In any given month, if both the Failure to File and Failure to Pay penalties apply, the combined tax penalty assessment cannot exceed 5% of the tax amount owed.
· Penalty Abatement Procedures: A Failure to Pay penalty waiver may be granted for the same reasons as those described above under Failure to File. However, it important to note that, although a Failure to Pay or a Failure to File penalty abatement may be granted, the interest on any taxes owed will continue to accrue until the back tax balance is paid in full.
Penalty for the Underpayment of Estimated Tax
· Tax Consequences: Taxpayers who earn or receive income that is not subject to withholding tax must make quarterly estimated tax payments to cover the tax amounts due for this income. When these payments are not made or are not sufficient to cover the taxes owed, the IRS assesses a Penalty for the Underpayment of Estimated Tax. This is generally equal to 5% of the tax amount owed for each month or partial month that the tax balance is overdue.
· Penalty Abatement Procedures: The IRS normally waives the Penalty for Underpayment of Estimated Tax if the total amount of the unpaid tax balance is less than $1000 or if at least 90% of the tax balance shown on the current year’s tax return or 100% of that shown on the previous year’s return has been paid. Outside of these conditions, the IRS may abate the Penalty for the Underpayment of Estimated Tax when the taxpayer can prove that it has been calculated incorrectly or that calculating it by a different method would either reduce or eliminate it. This penalty will also generally be waived when the underpayment of estimated taxes is due to extenuating circumstances rather than willful neglect.
Inaccurate Tax Return Penalty
· Tax Consequences: The IRS may assess a tax penalty when various inaccuracies such as negligence or the understatement of taxes result in an underreporting of the tax amount due. Generally, this penalty is only imposed when the amount shown on a tax return is more than 10% or $5000 less than amount of taxable income that should be shown.
· Penalty Abatement Procedures: The Inaccurate Tax Return Penalty can sometimes be abated when a taxpayer is able to provide sufficient documentation to show that an error was made despite reasonable efforts to exercise ordinary care and prudence in preparing the return.
Take heart! Although it is best to avoid tax penalties altogether, receiving one is not the end of the world! Consult a certified tax professional to investigate the options available for obtaining a penalty waiver.
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