There are multiple types of penalties the Internal Revenue Service can penalize a taxpayer with. If you file your tax return late, the IRS will assess you the failure to file penalty. If you do not pay your taxes by the due date, the IRS will assess you the failure to pay penalty. If a business does not timely make tax deposits, the IRS will assess the business the failure to deposit penalty.
In addition to the above, the IRS can assess other penalties as well as interest on unpaid tax debts.
The good news for taxpayers is portions of, or all penalties may be waived or abated through a formal penalty abatement request with the Internal Revenue Service. The IRS will waive penalties when a taxpayer can establish reasonable cause. Reasonable cause should be thought of as causation or the reason the taxpayer was unable to file the return, pay the tax or take the necessary actions to prevent the assessment of the tax penalty. A Denver tax attorney at The McGuire Law Firm will assist you in compiling your penalty abatement request and establishing reasonable cause to have the penalties waived.
For example, if the taxpayer or an immediate family member was ill and this illness prevented the taxpayer from being able to timely file their return, the IRS may consider abating the failure to file penalty. Furthermore, based on the above example, if an increase in out of pocket medical expenses placed the taxpayer in a situation where they could not afford to pay the tax or payment of the tax would create a severe economic hardship, the IRS may consider abating the failure to pay penalty. Each penalty abatement request is reviewed on a case by case basis, based upon the facts of the taxpayer. Further, the IRS may agree to waive one of the penalties, such as the failure to pay penalty, but not agree to waive other penalties such as the failure to file penalty.
Two of the most common penalties are the failure to file penalty and the failure to penalty. Both penalties can max out at 25% of the amount of the tax due. One major difference between these penalties is the time period in which the penalty is assessed. The failure to file penalty is assessed at a rate of 5% and thus will max out after the return has not been filed for five months after the due date. The failure to pay penalty is assessed at a rate of .5% per month and thus will max out after the tax has not been paid for 50 months. Thus, it is typically much better for a taxpayer to file their return timely even if they are unable to pay the amount of tax due because the failure to file penalty accrues much faster than the failure to pay penalty. Moreover, if a taxpayer formalizes an installment agreement to resolve their liabilities, the failure to pay penalty is reduced to .25% per month. Thus, always file your returns timely!
Any taxpayer that has been assessed certain penalties from the IRS should contact a tax attorney to discuss the possibility of the penalties being abated. You can speak with a Denver tax attorney by contacting The McGuire Law Firm.