Why Does The IRS Issue Penalties?
The IRS imposes tax penalties for many reasons. Actually there are over 148 IRS penalties. Although usually monetary in nature, penalties involving forfeiture of property or even jail time are not uncommon. Some of the more common reasons that taxpayers face IRS penalties include:
- Late filing penalties. If you fail to file your tax return on or before the due date the penalty assessed is based on the amount of tax owed as well as how long the return remains unfiled.
- Late payment penalties. Even if the taxpayer files on time the IRS may impose a penalty if payment of taxes is delayed for any reason. As with the late filing penalty, this penalty will be vary depending on the amount owed.
- Accuracy related penalties. If taxes owed on a tax return are adjusted upward by the IRS at a later date the taxpayer may be subject to this type of penalty. The penalty can range from 20% to 40% of taxes owed due to substantial inaccuracies for reasons like the following: negligence of rules, understatement of tax, various valuation misstatements and pension liability overstatement.
- Trust Fund Recovery Penalty. This penalty is imposed against employers who neglect to withhold income and social security taxes paid to their employees and then forward this income to the government.
What Is IRS Penalty Abatement?
The IRS may remove or reduce a penalty or interest imposed upon a taxpayer. This process is known as penalty abatement and is achieved by many taxpayers seeking this type of tax relief. The taxpayer must be prepared to have a legitimate reason for making the request and must have their case well documented and substantiated.
Positives are that abatement can sometimes reduce the total tax debt to a manageable level. Also, the IRS does not charge a fee as they do in other circumstances.
Negatives are that it can be tedious (including documenting your basis for the claim). And, in the end, you still owe the original taxes.
When Are IRS Penalties Abated?
The IRS grants penalty abatement for the following reasons:
- Reasonable cause (examples: death or serious illness in the family or prolonged unemployment),
- IRS fault (examples: an error or delay that led to a correction)
- Administrative waiver (example: government directive to provide natural disaster relief).
- Statutory exception (change in the Internal Revenue Code mitigates a liability).
The IRS resolves less than half of penalty abatement cases in favor of the taxpayer. Interest abatement cases are even more difficult to have resolved favorably. While any IRS level can grant abatement, it is the supervisory level that grants most favorable resolutions.
Who Should The Taxpayer Seek Advice From?
IRS personnel are trained to say to reject these types of requests as a matter of due course. Relying on the help of a tax problem expert, can increase significantly the chances of obtaining a favorable resolution. An experienced certified Enrolled Agent or tax attorney will be able to frame your case in the best possible light for favorable resolution.