Got IRS Penalties? Know the Rules, Pay Nothing
If you’ve received an IRS penalty notice, you may not need to pay it immediately. The IRS imposes various penalties for late tax returns, unpaid taxes, and failure to deposit employment taxes, but there are options to have these penalties reduced or removed entirely. Here’s how you can handle it.
Common IRS Penalties
The IRS imposes heavy penalties for late filings and unpaid taxes:
- Late Filing Penalties:
- For individual or C corporation returns, the penalty is 5% of the total tax owed per month, up to 25%. For fraudulent filings, it’s 15% per month, capped at 75%.
- The penalty for partnerships or S corporations is $245 per partner or shareholder per month for up to 12 months.If a return is more than 60 days late, the penalty is either $510 or 100% of the tax owed, whichever is less.
- Late Payment Penalties:
- A penalty of 0.5% of the unpaid tax per month applies, up to 25% of the total tax owed.
- Employment Tax Penalties:
- If you miss a deadline for depositing employment taxes, the penalties are:
- 2% if less than five days late
- 5% if five to 15 days late
- 10% if more than 15 days late.
- If you miss a deadline for depositing employment taxes, the penalties are:
Examples of Penalties
- If you file your individual return two months late and owe $3,000, you might face $300 in penalties ($270 for late filing and $30 for late payment).
- A late S corporation filing with 10 shareholders might incur a penalty of $2,450 if filed five days late.
- A late deposit of $4,000 in monthly employment taxes could lead to a $200 penalty.
Relief Options
There are ways to have IRS penalties removed, and in some cases, you can even receive a refund if you’ve already paid the penalty.
First-Time Abate (FTA)
If this is your first penalty or you haven’t had a penalty in the past three years, you may qualify for a “first-time abatement.” This can result in the removal of penalties for failure to file, pay, or deposit taxes. The IRS is often willing to grant this relief automatically if you have a clean tax history for the past three years.
- For example, if you missed paying quarterly payroll taxes, you could use FTA to remove one of the penalties for a specific quarter.
The IRS prefers to grant FTA before considering other reasons for penalty relief.
Partnership Relief
If your partnership return was filed late, you might qualify for relief under Revenue Procedure 84-35. This applies if the partnership has 10 or fewer partners and all partners reported their shares of the partnership tax items on time.
Reasonable Cause
If you don’t qualify for FTA or partnership relief, you may request penalty relief based on a “reasonable cause.” Acceptable reasons include:
- Death or serious illness: Provide details of the illness or death, how it affected your ability to file or pay, and how you resolved the situation.
- Natural disasters or casualty events: If you were in a federally declared disaster area, explain how the event disrupted your life or business and how you complied as soon as possible.
- Inability to obtain records: If you couldn’t get your records to file on time, explain why they were unavailable and your efforts to retrieve them.
- Other reasonable causes: If you exercised care but couldn’t meet your obligations, provide a clear explanation and timeline.
Avoid general excuses like “I forgot” or “I didn’t know the law,” as these are not valid reasons for penalty relief.
Handling Large Penalties:
If the penalty is substantial, you may need to submit a written request for relief. The IRS won’t specify a threshold amount but will inform you if this is required during your phone conversation.
Persistence Pays Off:
If the IRS denies your initial penalty relief request, you can appeal the decision with the IRS Appeals Office. Make sure to follow the instructions in the denial letter for further steps.
Refunds for Paid Penalties:
If you’ve already paid a penalty, you can request a refund using Form 843, as long as it’s within three years from when you filed the return or two years from when you paid the penalty.
Interest Relief:
The IRS also charges interest on penalties. If your penalties are reduced or removed, the IRS will typically reduce or remove the related interest.
Key Takeaways
To get IRS penalties removed:
- Step 1: See if you qualify for First-Time Abate (FTA). This is often your best option if you haven’t had penalties in the past three years.
- Step 2: If it’s a partnership return, check if you qualify for relief under Revenue Procedure 84-35.
- Step 3: If you’re not eligible for automatic relief, provide a detailed explanation for your reasonable cause backed by supporting evidence.
Most of the time, a simple phone call with the correct information and persistence can lead to penalty relief. Be clear, specific, and well-prepared when you contact the IRS.