The IRS now collects over 8 billion (billion, not million) dollars a year from penalties.  Penalties are a major source of federal funding.  Congress is addicted to IRS penalties.

There are four major types of tax penalties for individuals.

(1) A 20% penalty is added if your return understated your income tax liability.

(2) A 75% penalty is added if the IRS determines that you fraudulently failed to file a tax return, 15% a month up to five months.

(3) A 1/4% to 1% penalty per month is added if you failed to pay on time, up to a maximum of 22.5%.

(4) A 25% penalty is added if your return was filed late, 5% per month up to five months.

Don’t forget that interest accrues on unpaid taxes, unpaid penalties, and unpaid interest!  Borrowing money from the IRS by not paying on time is a great way to spiral into poverty because of the interest and penalties.

Penalties can be reduced by the IRS, which is called penalty abatement.  Interest generally cannot be abated, with limited exceptions.

Penalties can be abated for reasonable cause.  Reasonable cause is not precisely defined.  The Internal Revenue Manual references the following items as constituting reasonable cause.

  • Death or serious illness.
  • Unavoidable absence of the taxpayer.
  • Destruction by fire or other casualty of the taxpayer’s records or place of business.
  • For employment taxes, the taxpayer was unable to determine the amount of tax deposit due for reasons beyond the taxpayer’s control.
  • The taxpayer’s ability to make deposits or payments was materially impaired by civil disturbances.
  • Lack of funds when the taxpayer can demonstrate that it occurred despite the exercise of ordinary business care and prudence.  (This is rare.)
  • Other explanations where the taxpayer exercised ordinary care and prudence but nevertheless was frustrated from complying with payment obligation by events outside their control.

Call us for help with penalty abatement.