Got IRS Penalties? Know the Rules, Pay Nothing

Got IRS Penalties? Know the Rules, Pay Nothing

Published on January 20, 2025

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:

  1. 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.

  2. Late Payment Penalties:

    • A penalty of 0.5% of the unpaid tax per month applies, up to 25% of the total tax owed.

  3. 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.

Examples of Penalties

  1. 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).
  2. A late S corporation filing with 10 shareholders might incur a penalty of $2,450 if filed five days late.
  3. 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:

  1. 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.
  2. Step 2: If it’s a partnership return, check if you qualify for relief under Revenue Procedure 84-35.
  3. 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.

Return to Blog

Read other blog posts

How to Deal with Huge Tax Debt

Published on January 27, 2025
Owing taxes to the IRS can be overwhelming, but there are options to reduce or manage your debt. Understanding the collection process and knowing what steps to take can help prevent financial distress. Below is a summary of the available options to deal with tax debt. Collection Process When taxes aren’t paid by the filing […]
How to Deal with Huge Tax Debt

Charitable Contributions From Your IRA: Tips and Traps

Published on January 13, 2025
When you turn 70½, you gain the opportunity to use your IRA for charitable contributions in a tax-efficient manner. This strategy allows you to make charitable donations directly from your IRA, known as Qualified Charitable Distributions (QCDs), which can potentially offer significant tax advantages compared to withdrawing funds from your IRA and donating them personally. […]
Charitable Contributions From Your IRA: Tips and Traps

QBI Deduction: Maximize It Before It’s Gone

Published on December 30, 2024
The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act (TCJA), offers a valuable opportunity for business owners to reduce their tax liability by up to 20% of eligible business income. This deduction applies to income from sole proprietorships, partnerships, S corporations, and other pass-through entities, as well as some dividends […]
QBI Deduction: Maximize It Before It’s Gone

2024 Year-End Tax Strategies for Your Stock Portfolio

Published on December 23, 2024
As 2024 comes to a close, it’s crucial to review your stock portfolio to implement strategies that minimize taxes. By making some strategic moves, you can avoid paying high taxes on short-term capital gains and lower the tax rate on your gains, potentially reducing it to 23.8% or even 0%. Here are seven strategies to […]
2024 Year-End Tax Strategies for Your Stock Portfolio

Primer: When Cancellation of Debt (COD) Income Can Be Tax-Free

Published on December 09, 2024
When a borrower’s debt is canceled, it generally results in a Cancellation of Debt (COD) income, which is taxable under federal law. However, several essential exceptions allow this income to be excluded from taxes, depending on the circumstances. Here’s an overview of when and how COD income can be tax-free: General Rule: COD Income Is […]
Primer: When Cancellation of Debt (COD) Income Can Be Tax-Free

Do You Owe Self-Employment Tax on Airbnb Rental Income?

Published on December 02, 2024
A key question for many Airbnb hosts and vacation property owners is whether they owe self-employment tax on the income they earn from renting out their properties. The IRS addressed this issue in **Chief Counsel Advice (CCA) 202151005**, which provides insights into the treatment of rental income for self-employment tax purposes. However, it’s important to […]
Do You Owe Self-Employment Tax on Airbnb Rental Income?

Are You Cheating Yourself by Using IRS Mileage Rates?

Published on November 25, 2024
Choosing Between IRS Mileage Rates and Actual Expenses for Business Vehicle Deductions In 2022, if you purchased a $50,000 SUV for business use and drove it 15,000 miles (87% business-related), you would have to decide whether to use the IRS standard mileage rates or the actual expense method to deduct vehicle-related costs. The IRS mileage […]
Are You Cheating Yourself by Using IRS Mileage Rates?

The Supreme Court Likely Shook Up Your Buy-Sell Agreement

Published on November 11, 2024
The U.S. Supreme Court’s recent decision in the Connelly case significantly impacts businesses that utilize buy-sell agreements funded by life insurance for shareholder succession. This ruling may affect estate tax liabilities and the valuation of company shares when a shareholder dies, prompting companies to reconsider their agreements. Background on Buy-Sell Agreements Buy-sell agreements are essential […]
The Supreme Court Likely Shook Up Your Buy-Sell Agreement

The Department of Labor Makes It Harder to Hire Independent Contractors

Published on November 04, 2024
The U.S. Department of Labor (DOL) is tightening regulations around the classification of workers, making it more challenging for businesses to classify workers as independent contractors instead of employees. This shift is primarily aimed at ensuring more workers receive protections under the Fair Labor Standards Act (FLSA), which mandates minimum wage and overtime pay. FLSA […]
The Department of Labor Makes It Harder to Hire Independent Contractors

BOI Latest Updates for Dissolved and Disregarded Entities

Published on October 28, 2024
As the deadline for filing Business Ownership Information (BOI) reports approaches, businesses must ensure compliance with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Understanding the specific requirements and recent updates is critical to avoid severe penalties. Filing Deadlines Businesses that existed on January 1, 2024, are required to file their BOI […]
BOI Latest Updates for Dissolved and Disregarded Entities