Penalty rates vary based on the type of penalty assessed. For the most common penalties, here are the rates:
Failure to pay: 0,5% per month, up to a maximum of 25%. this penalty will increase to 1% if the IRS has to enforce collection of the balance owed.
Failure to file: 5% per month, up to 25%. fraudulent failure to file increases the penalty to 15% per month, up to a maximum of 75%.
Estimated tax: equivalent to the amount of interest lost to the IRS by not making timely payments throughout the year.
Accuracy: 20% of the understatement of tax. Fraud increases the penalty to 75%.
The most common abatable penalties are failure to file and pay penalties: taxpayers have several options to request abatement (relief after the penalty is assessed) for the failure to file and pay penalties, including first-time abatement and reasonable cause arguments.
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Disaster penalty relief is usually applied automatically by the IRS: taxpayers who live in Presidentially declared disaster areas (identified by zip code) will automatically receive the stated late filing and payment relief. If this relief is not provided automatically, the taxpayer can contact the IRS to request relief.
Most penalty abatement requests are for first-time abatement: taxpayers with a clean compliance history (no penalties in prior three years (except for estimated tax penalty), all required returns filed, compliant with any payment agreement related to any debt owed) can use first time abatement to remove the failure to file or pay penalty. First time abatement does not apply to accuracy penalties.
There are do’s and don’ts when requesting relief due to reasonable cause: there are certain arguments that are a non-starter for reasonable cause abatement. For example, using “reliance on my tax preparer” is never a good excuse for late filing. The IRS will always deny it. However, an unforeseen illness, lack of records, and other reasonable cause arguments can be successful. Taxpayers using any reasonable cause argument should always show how they made a reasonable attempt to comply but could not because of circumstances that were outside of their control.
Many penalty abatement requests are denied – requiring the taxpayer to appeal the adverse decision: the IRS uses an automated decision-making tool to make penalty relief determinations. This tool is flawed and often produces incorrect adverse penalty determinations. Taxpayers often receive adverse penalty abatement determinations that appear not to consider all of the facts and circumstances. Taxpayers should appeal their decision to the IRS in order to have the entirety of their circumstances considered.
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