Ever felt the pinch of the IRS taking 5% of your unpaid taxes for each month your tax return is overdue? If you’re more than 60 days late, the penalty could equal your entire tax bill! But there’s great news this year—around $1 billion in penalty relief is on the table from the IRS, aimed primarily at taxpayers earning under $400,000.
Why does this matter to you?
If you’re among the many who’ve faced penalties, this could be your chance to reduce what you owe significantly. This relief initiative is a rare opportunity to clear your slate without the usual financial burden, especially if your earnings fall within the majority of American households.
In this guide, we’ll show you how to determine if you qualify for this relief, how to apply for it, and how to get IRS to waive penalties and interest, potentially saving you hundreds or even thousands in penalties.
What is IRS Penalty?
An IRS penalty is a fine or additional charge imposed by the IRS on taxpayers who fail to comply with tax laws and regulations. These penalties are meant to encourage compliance and deter taxpayers from neglecting their tax obligations.
IRS penalties vary based on the type of violation. For instance, a failure-to-file penalty applies when a tax return isn’t submitted on time, while a failure-to-pay penalty kicks in when taxes aren’t paid by the deadline.
Taxpayers need to understand these penalties to avoid unnecessary charges and maintain good standing with the IRS. However, here’s the good news: In some cases, taxpayers may qualify for penalty relief if they can show reasonable cause for their non-compliance.
Most Common IRS Penalties You Need to Know!
Knowing about these common types of IRS penalties can help you steer clear of costly mistakes and ensure you stay in good standing with your tax obligations.
- Information Return: This penalty applies if you don’t file or provide necessary information correctly by the deadline.
- Failure to File: If you’re wondering how much is the IRS penalty for late filing, the penalty is 5% of the unpaid taxes for each month or part of a month that your return is late. The penalty can accumulate up to a maximum of 25%.
- Failure to Pay: This penalty is charged at 0.5% of unpaid taxes for each month or part of a month the tax remains unpaid, also up to a maximum of 25%. Therefore, if you are wondering, in this case, how much is IRS late payment penalty, then it is around 0.5 percent per month.
Note: If both Failure to File and Failure to Pay penalties apply in the same month, the total combined penalty is 5% per month. After 5 months, the Failure to File penalty maxes out, but the Failure to Pay penalty can continue until it reaches the maximum.
- Accuracy-Related Penalty: This penalty applies if you underpay your taxes due to unreported income or invalid deductions and credits. It typically involves two common scenarios:
- The first is negligence or disregard of tax rules. In this case, a 20% penalty is applied to the underpaid tax caused by carelessness or failure to follow regulations.
- The second situation involves a substantial understatement of income tax. Here, a 20% penalty is also imposed on the portion of tax underpaid due to significantly underreporting taxable income.
- Erroneous Claim for Refund or Credit: If you claim an excessive amount for a refund or credit without reasonable cause, you face a 20% penalty on the excessive amount, as outlined in IRC 6676 enacted in 2007.
- Failure to Deposit: Employers face this penalty for not making employment tax deposits on time, in the correct amount, or in the proper manner. The penalty percentage depends on how late the deposit is made, starting from the due date.
- Tax Preparer Penalties: Tax professionals, including CPAs and enrolled agents, may incur penalties for not adhering to tax laws. Penalties include interest charged monthly until the full amount is paid.
- Dishonored Check or Other Form of Payment: If a payment (check or electronic) is returned by your bank due to insufficient funds, the penalty is either the payment amount or $25 for payments less than $1,250, and 2% of the payment amount for $1,250 or more.
- Underpayment of Estimated Tax by Corporations: Corporations must pay quarterly estimated taxes if they expect to owe $500 or more. Penalties apply for underpaying or late payments, even if a refund is due.
- Underpayment of Estimated Tax by Individuals: Similar to corporations, individuals, estates, and trusts face penalties for not paying enough estimated tax or paying late, regardless of a possible refund.
11 International Information Reporting: Penalties apply for failing to report foreign financial activities accurately and on time. Notices are mailed, and interest is charged monthly until full payment is made.
To get a better understanding of the types of penalties, get in touch with Peter Salinger and his team. Additionally, he can provide advice and services that go beyond penalty abatement, offer in compromise, and more.
From managing back taxes and setting up IRS installment agreements to comprehensive tax preparation services, he can significantly ease your tax-related stress and ensure you make informed decisions.
4 Tips for Avoiding Common IRS Penalties
Avoiding common IRS penalties is crucial because they can lead to significant costs in fines and interest. By staying compliant and following the rules, you can safeguard your finances and reduce stress.
File Tax Returns On Time
Filing your tax returns by the deadline is crucial to avoid late filing penalties, which can quickly add up. Even if you are unable to pay the full amount owed, submitting your return on time is essential.
Consider filing for an extension if you need more time to gather your documents, but remember that this only extends the filing deadline—not the payment deadline.
Pay Taxes Due
Paying as much of your tax liability as possible by the due date is vital to minimize interest and late payment penalties.
If you can’t pay the full amount, the IRS offers payment plans and installment agreements to help you manage your obligations over time. Prioritizing payment can significantly reduce the overall cost of your tax bill.
Report Income Accurately
Accuracy is key when it comes to reporting income and deductions. Double-check all figures to ensure they are correct, as errors can lead to penalties and additional scrutiny from the IRS.
Utilize tax software or consult a tax professional to ensure your returns are error-free and comply with IRS regulations.
Make Estimated Tax Payments
If you’re self-employed or have income without tax withholding, like freelance or investment income, making quarterly estimated tax payments is essential. This keeps you up-to-date with your taxes and prevents underpayment penalties.
Follow the above tips religiously if you want to minimize your risk of incurring IRS penalties.
What is an IRS Penalty Waiver?
An IRS penalty waiver is a provision that allows taxpayers to request the removal or reduction of penalties imposed by the IRS for failing to comply with tax laws.
The IRS recognizes that there are situations where taxpayers may be unable to meet their tax obligations due to circumstances beyond their control, and penalty waivers provide relief in such cases.
To qualify for a waiver, taxpayers generally need to demonstrate reasonable cause or meet specific criteria established by the IRS.
5 Common IRS Penalty Waivers
Understanding the IRS penalty waivers is essential because they can help you avoid paying unnecessary fines and reduce your overall tax liability. Knowing which waivers apply to your situation can save you money and reduce stress when dealing with the IRS.
1. First-Time Penalty Abatement (FTA)
The First Time Penalty Abatement is a one-time relief available to taxpayers who have a clean compliance history.
To qualify, taxpayers must meet the following criteria:
- No penalties (except estimated tax penalties) have been assessed in the past three years.
- All required returns have been filed or a valid extension is in place.
- All taxes due are paid or arrangements to pay are in place (e.g., an installment agreement).
The FTA can be applied to penalties for failure to file, failure to pay, and failure to deposit.
2. Reasonable Cause
Reasonable cause penalty relief is granted when a taxpayer can show that they exercised ordinary business care and prudence but were unable to comply with tax obligations due to circumstances beyond their control.
Reasonable causes typically include:
- Serious illness or death of the taxpayer or a close family member.
- Unavoidable absence due to uncontrollable circumstances.
- Natural disasters, fire, or other casualties.
- Inability to obtain necessary records.
- Erroneous written advice from the IRS.
To request this waiver, taxpayers must provide a detailed explanation and relevant documentation to support their claim.
3. Statutory Exception
A statutory exception occurs when a penalty is waived because the taxpayer meets the criteria outlined by law. For example, if the IRS issues incorrect written advice, a taxpayer may qualify for penalty relief.
To request relief based on a statutory exception, taxpayers need to provide evidence that they relied on incorrect advice from the IRS.
4. Administrative Waiver
The IRS may grant an administrative waiver in certain situations where broad-based relief is appropriate, such as during a natural disaster or other significant event.
For example, the IRS may automatically waive penalties for taxpayers in a disaster area declared by the federal government.
5. Undue Hardship
Penalties may be waived if paying them would cause undue hardship to the taxpayer.
- To qualify, the taxpayer must demonstrate that paying the penalty would result in a significant financial loss.
- This type of waiver is often considered in conjunction with reasonable cause.
If you need professional assistance, we can guide you through the IRS penalty abatement option and more.
Our team of experienced professionals offers comprehensive services, including IRS non-collectible status assistance, and we have an in-house wage garnishment attorney to help. We make dealing with IRS issues simpler and less stressful for you.
Let us help you tackle your tax challenges and secure the relief you need.
How to Get your IRS Penalties and Interests Waived?
If you’ve already incurred penalties, you may be wondering how to get IRS to waive penalties and interest.
Getting tax penalties waived by the IRS can provide significant financial relief. Here’s a step-by-step guide on how to request and potentially secure a waiver for your tax penalties:
Step 1: Understand the Types of Penalty Waivers
Before you request a waiver, understand the types of penalty waivers available:
- First-Time Penalty Abatement (FTA)
- Reasonable Cause
- Statutory Exception
- Administrative Waiver
- Undue Hardship
Step 2: Determine Eligibility
Review the criteria for each type of waiver to determine which one applies to your situation:
- First-Time Penalty Abatement (FTA): This is available to taxpayers with a clean compliance history over the past three years.
- Reasonable Cause: This applies if you can show that you exercised ordinary business care and prudence but were unable to comply due to circumstances beyond your control.
- Statutory Exception: This applies if the penalty was assessed due to incorrect written advice from the IRS.
- Administrative Waiver: This is generally granted in broad circumstances, such as natural disasters.
- Undue Hardship: This applies if paying the penalty would result in significant financial loss.
Step 3: Accumulate Documentation
Collect all necessary documents that support your claim. The type of documentation needed will depend on the waiver you’re seeking. Examples include:
- Medical records or death certificates for reasonable cause related to illness or death.
- Insurance claims or repair bills for natural disasters.
- Correspondence from the IRS for statutory exceptions.
Step 4: Prepare a Written Request
Write a detailed letter to the IRS explaining why you believe you should qualify for a penalty waiver. This includes:
- Your name, address, and Social Security number or taxpayer identification number.
- The type of penalty and tax year(s) involved.
- A detailed explanation of why you have requested the waiver, including relevant facts and circumstances.
- Any supporting documentation.
Step 5: Complete Necessary Forms
In some cases, you may need to fill out specific IRS form(s):
- Form 843: “Claim for Refund and Request for Abatement” for requesting a penalty abatement.
- Form 8857: “Request for Innocent Spouse Relief” if the penalty relates to an innocent spouse claim.
Step 6: Submit Your Request
Send your written request to the IRS.
- You can mail it to the address specified in the penalty notice or the appropriate IRS office.
- If you’re dealing with a specific IRS employee, submit your request directly to them.
Step 7: Follow Up
After submitting your request, follow up with the IRS if you do not receive a response within a reasonable timeframe (typically 30-60 days). Check the appropriate timeline on the IRS website as it may change over time. Keep a copy of all correspondence and documentation for your records.
If your situation is complex and you are unsure about how to proceed, consider consulting Salinger Tax Consultants. We can guide you through obtaining a waiver and reducing your financial burden.
Final thoughts
As we wrap up this blog, you’re now better prepared to handle your taxes with confidence. With the tips and advice we’ve shared, navigating the tax system can be a little less daunting.
And remember, if the idea of going up against the IRS on your own feels overwhelming, Salinger Tax Consultants are just a call away. Their team of former IRS agents is ready to help you manage any penalties or waivers you might face, ensuring you get the best outcome possible. So, you don’t have to face the IRS alone—with their expert support, you’re in good hands.
