IRS Penalties and What To Do About Them
The IRS has many, many penalties that it can assess against a taxpayer. If you owe the IRS money and there is a small amount of interest and penalty assessed also, you might be best to simply pay it if you agree that you owe it. But penalties can add up to a substantial amount rather quickly. In those instances, please consider calling Scott H. Novak for assistance. Mr. Novak has had success having penalties reduced or abated in many instances. What are some of the more common penalties and will the IRS abate them?
Failure to File
If you are required to file an income or excise tax return and fail late or do not file at all, a late filing penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month the return is late, up to a maximum of 25%. A minimum penalty of $135 may apply for late filing of an income tax return. If you cannot file on time, consider filing an extension – that will push the filing date out by 6 months. Even if you cannot pay your tax liability, file the return on time so that you are not penalized for late filing.
Can the failure to file penalty be abated? Yes, under certain circumstances. To get the penalty abated, you would have to be able to show that you did not file on time due to reasonable cause (medical issues, records destroyed in a storm or fire, etc.). If the IRS determines that the late filing was due to willful neglect, the penalty will not be abated.
Failure to Pay
If you fail to pay your tax liability by the due date, you may be subject to the failure to pay penalty. The penalty is ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If you have both a failure to file and a failure to pay penalty, the 5% failure to pay penalty is reduced by the failure to file penalty. Again, a $135 minimum could apply.
Does filing an extension extend the time that you have to pay the IRS? No. In order to avoid the failure to pay penalty, at least 90% of your tax liability must be paid by the original due date of the return. This penalty can also be abated for reasonable cause.
Accuracy Related Penalty
If additional tax is due on your return because of negligence, disregard of rules or regulations, substantial understatement of income, and certain over- and undervaluations, the IRS often imposes an accuracy-related penalty of 20% of the underpayment. The penalty can be as much as 40% in certain instances. This penalty is particularly difficult, though not impossible, to overcome. Each case is different, but some common themes apply. Your misuse or misunderstanding of a tax preparation software program will generally not allow for the penalty to be abated. If, however, the program clearly did not cover something that should have been on your return, or covered it incorrectly, you may get the penalty abated. This was the defense successfully used by Timothy Geithner and it came to be known as the Turbo-Tax defense.
People do make mistakes and showing that a simple mistake or omission occurred might get you off the hook. But if you missed a substantial item (e.g., a $50,000 1099 when you earn a wage of $75,000), the IRS is not likely to be sympathetic.
Trust Fund 100% Penalty
Employers withhold money for taxes from employees’ paychecks every pay period. The IRS considers that money to be their money the instant the employee is paid. The money is considered to be held “in trust” by the employer for the benefit of the IRS. If the employer fails to pay that money to the IRS, a “responsible person” may be held liable for not only the withheld tax, but also a penalty equal to 100% of the tax that should have been paid over to the IRS.
Who is a “responsible person?” Many factors go into the determination of who is a responsible person. Simply put, if you have the power to make a decision to pay or not pay, you are a responsible person. Directors, shareholders, officers, lawyers, accountants and trustees have all been deemed responsible persons. Someone who is simply taking direction from another and has no power to decide who gets paid will not be a responsible person. The IRS will cast a wide net when it comes to the trust fund penalty and will find as many responsible persons as possible. Each one could be liable for the entire penalty.
Frivolous Return Penalty
The IRS points out that if an idea to save on taxes seems too good to be true, it probably is. Filing a frivolous return will result in a penalty of $500, in addition to any other penalties and interest that apply. A frivolous return is one that does not include enough information to figure the correct tax, and that indicates a frivolous position on your part, or a desire to delay or interfere with the administration of federal income tax laws.
Civil fraud penalties can be quite high. The penalty for filing a fraudulent return is 75% of the underpayment that is attributable to fraud. The penalty for late filing due to fraud is 15% per month of the net amount of taxes due, up to a maximum of 75%.
Any criminal matter with the IRS is very serious business. In addition to the possibility of incarceration, there could be substantial criminal penalties for fraud and false statements, willful failure to file a return, provide information, or pay any tax due, and for tax evasion. The IRS brings a relatively small number of criminal cases each year. When they do prosecute a criminal case, the incarceration rate is greater than 81%. Do not handle these matters alone. Contact Mr. Novak immediately upon learning that you are involved in a criminal IRS matter.