The only thing more complicated than filing your taxes is figuring out how to deal with the IRS charging you a tax penalty for an honest mistake. It is very stressful when you’ve filed your taxes in good faith, but the IRS claims you did not properly file or pay. Fortunately, the IRS offers multiple ways to eliminate these fees, depending on your situation.
If this is the first time the IRS has assessed penalties and interest on your taxes, you may qualify for First Time Penalty Abatement (FTA). If you are not eligible for FTA, you may be able to get your fees lowered or eliminated by filing for Reasonable Cause Penalty Abatement. The IRS understands honest mistakes happen, disasters strike, and untimely deaths occur. They offer penalty abatement as a chance for you to explain what happened to prevent you from filing or paying on time.
Common Types of Tax Penalties
For the most common types of tax penalties, the fees are usually a small percentage of the taxes due. But while the amount starts out small, the penalty may increase monthly and accrue interest, and your debt may grow from hundreds to thousands of dollars. Typically, the IRS starts charging interest on the day the penalty is due.
Not all penalties are eligible for abatement, but here are some common penalties that may be reduced or eliminated by filing for Reasonable Cause Penalty Abatement:
- Failure to File: If you file late, or do not file at all, the IRS will send you a Failure to File penalty notice. The penalty is 5% of the unpaid taxes for every month (or part of a month) that the tax return is late, up to 25% of the taxes due. This amount is slightly reduced if you also owe a Failure to Pay penalty.
- Failure to Pay: If you do not pay the full amount shown on your tax return by the due date, or if the IRS finds that you did not report all the taxes you owe your tax return, they will send you a Failure to Pay penalty notice. For failure to pay the amount shown, the penalty is 0.5% of the underpaid taxes for every month (or part of a month) that the tax return is late, up to 25% of the taxes due. For unreported taxes, this penalty increases from 0.5% to 1% if you do not pay within 10 days of receiving the notice.
- Failure to Deposit: If a business does not deposit the employment taxes due (this includes federal income tax, Social Security, Medicare, and federal unemployment tax), the IRS will send a Failure to Deposit penalty notice. Depending on how late the deposit is, the penalty can range from 2% up to 15% of the taxes due.
- Accuracy related penalties: The two most common accuracy related penalties are the “substantial understatement” penalty and the “negligence or disregard of the rules or regulations” penalty. A penalty may be levied against you if you claimed deductions or credits that you don’t qualify for or did not keep records to show your qualification. You may also receive an accuracy penalty if you understate your owed taxes by 10% or $5000, whichever is greater. These penalties are 20% of the net understatement of tax.
As you can see, if you receive a penalty notice from the IRS, it is best to address it right away so that the penalty fee does not continue to grow. This does not necessarily mean the penalty must be paid. If you meet the eligibility requirements, you can get the penalty removed by filing for abatement.
Penalty Abatement Methods
The IRS understands that good people may run into situations where they make an error when filing or cannot file on time. Taxes can be complicated. Even if you do your best to accurately report all your tax liabilities, you might make an honest mistake, or you may be in a life situation that prevents you from filing or paying on time.
If you’ve previously been compliant with your taxes and this is the first time you’ve received a penalty, the IRS gives you an easy way to ask for forgiveness with the FTA. For filers with no previous tax penalties, who have filed all the necessary returns, the First Time Penalty Abatement is available to eliminate tax penalties.
The FTA does not apply to accuracy-related penalties, and you may not meet all the qualifications for the FTA. In this case, you may still get your penalty reduced or eliminated by filing for Reasonable Cause Penalty Abatement.
To show reasonable cause, you must explain to the IRS that you did your best to file accurately and to file and pay on time. You must show that you acted in good faith to comply with the IRS’s rules.
Here are some examples of what “reasonable cause” for penalty abatement might be:
- Natural disaster, death, incapacitation, inability to obtain records. For instance, if you were hospitalized and unable to file taxes on time. Or perhaps a fire destroyed your records.
- An honest error. For example, maybe your employer documented an incorrect amount and you did not know it was wrong. Or perhaps you transposed two numbers while filling out the forms and did not catch the typo. This must be a reasonable error, though. If you input $400 when the amount should be $40,000 it will be difficult to argue that you didn’t notice the amount was wrong.
- Misguidance by a tax professional is often used but difficult to argue. For instance, if you have a professional prepare your taxes and they do not file on time, that is not a reasonable cause. The IRS says you are responsible for filing and paying your taxes, and that cannot be delegated to someone else.
- If the underlying reason for a lack of funds meets the abatement criteria, this may show reasonable cause. The IRS states that a lack of funds, in and of itself, is not reasonable cause.
The IRS requests that you send in as much information as you can to show your reasonable cause. This includes the facts and circumstances surrounding your inability to properly file or pay, and what actions you took once those circumstances changed. They also ask for any documentation you can provide, such as hospital or court records, including specific dates.
Like taxes, filing for penalty abatement is complicated and nuanced. To increase the odds of getting your penalty abatement approved, it’s important to hire someone who has experience with successful abatements.
S.H. Block Tax Services Can Help You File for Reasonable Cause Penalty Abatement
Our tax professionals have experience with successful penalty abatement requests. At S.H. Block Tax Services, we can guide you to the best practices for getting your tax penalties reduced or eliminated. For instance, we recommend paying your tax debt before making the abatement request.
If you are dealing with a tax penalty and you qualify for reasonable cause penalty abatement, we can help you compile the appropriate documents and create your written request for the IRS. Don’t wait another day to get started on resolving your debt with the agency!
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.
Wood, R. W. (2020, October 22). Common sense and reasonable cause for IRS penalties. The Tax Advisor. Retrieved from URL https://www.thetaxadviser.com/newsletters/2020/oct/reasonable-cause-irs-penalties.html
Internal Revenue Service. (2021, November 16). Penalty Relief Due to Reasonable Cause. Retrieved from URL https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-reasonable-cause
Internal Revenue Service. (2021, December 9). Penalty Relief. Retrieved from URL https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief