No matter the circumstance or the financial condition of the taxpayer, if a federal tax balance is accumulated, IRS penalties and interest will be imposed to the period in which tax is accrued. This is inevitable and unavoidable in the majority of circumstances.
Most Common Penalties
Failure to Pay (FTP) (IRC 6651): This penalty is assessed when a taxpayer files a return without paying the tax balance. The rate of penalty accrual is one-half of one percent each month a balance is owed. After a notice of intent to levy property is issued, the rate of accrual is increased to 1% if the balance is not paid within 10 days. This penalty caps at 25% of the total tax debt that remains unpaid. The FTP penalty accrual rate decreases to one-quarter of 1% during any month a formal payment plan is in place.
Failure to File (FTF) (IRC 6651): The failure to file penalty is placed on an account if a tax return is not filed by its due date and the tax balance is not paid in full. The rate of accrual is 5% of the total tax owed each month that the return is late. The penalty caps at 25% of the total tax debt that remains unpaid so the total penalty is fully assessed after five months. Once the return is sixty days late, the minimum penalty is either $205 or 100% of the tax owed. Subsequently, the IRS will not impose a penalty on a return that is filed late or if a refund is due. However, a taxpayer will lose their refund if the return is not filed within a period of three years from its initial due date.
If the failure to pay and failure to file penalties are imposed in the same month, the failure to file penalty is decreased by .5%.
Federal Tax Deposit Penalty (businesses only) (IRC 6656): Failing to remit required tax deposits for withholding, FICA, and unemployment tax will result in a federal tax deposit penalty. The penalty is calculated to 15% of the amount not deposited timely.
Estimated Tax Payment Penalty (IRC 6654 & 6655): If required quarterly payments are not remitted to the Internal Revenue Service timely, a penalty will be placed on the account. Personal deposits are due by April 15th, June 15th, September 15th, and January 15th. Corporate deposits are due by April 15th, June 15th, September 15th, and December 15th.
Bounced Check Penalty (IRC 6657): Writing a bad check to the federal government will result in a penalty one hundred percent of the time. The amount of the penalty is 2% of the bounced check unless the check is less than $1,250. In this case, the penalty is $25 or the amount of the check (whichever is lower).
Many taxpayers put off filing a return if they are unable to pay the balance due. This only serves a negative purpose as the amount of liability is increased when a failure to file penalty is imposed.
In addition to automatic penalties for failing to file a tax return and failing to pay a tax balance, the Internal Revenue Service may impose additional penalties for other reason such as filing a frivolous tax return, failing to remit proper tax forms, failing to make a reasonable attempt to comply with the Code, and providing a substantial understatement of income tax. These penalties are assessed at different intervals for various amounts based on the taxpayer circumstances and the Internal Revenue Code. Most penalties are not criminal; however, if there is tax fraud or evasion present, criminal charges may be sought.
Taxpayers may receive consideration for a penalty alleviation and/or refund if it can be established that reasonable cause was present at the time of tax accrual. Reasonable cause is judged on a case-by-case basis but the primary reasons are as follows:
- Ordinary business care and prudence
- Reliance on erroneous written or oral advice by an employee at the IRS
- Reliance on erroneous advice of a tax advisor
- Fire, casualty, or a natural disaster
- Error made by the IRS when computing tax due
- Death, serious injury, or unavoidable absence
- Lack of adequate records
- Ignorance of tax law
- Undue hardship (economic & financial argument)
Relief from penalties may be granted based on circumstances surrounding each case individually. The request can only be made once the penalty is fully assessed and the full burden of proof is on the taxpayer. While under review, the Internal Revenue Service will verify if there is a current tax balance due and if a resolution, such as an Installment Agreement, has been initiated by the taxpayer. Additionally, the preceding three years of tax returns will be reviewed for payment patterns and to verify overall tax compliance.
Generally, interest on a tax balance is not abatable unless there are extraordinary circumstances present. The main basis for interest relief usually stems from a delay caused by the Internal Revenue Service and its employees. Any other arguments must be remarkable.
The accrual of penalties and interest can make a tax liability double what the initial tax bill was. The best option for every taxpayer is to ensure that they file all tax returns on time and pay the full amount due. In some circumstances compliance is hard to obtain ad if this is the case, it is important to have a hold of enforced collection action initiated so that the federal government cannot seize your money or your assets. Ultimately, compliance will allow a formal resolution to be negotiated and it will keep the Internal Revenue Service away from your hard-earned money.
If you or your business are in need of protection, an account resolution such as an Offer In Compromise or Installment Agreement, and/or a penalty abatement, please contact our office at 844-345-3250.