Tax Penalties

Did you owe taxes this year for the first time? Did you file late? As result do

you have tax penalties? There are over 150 different IRS penalties for late

filing, late payment, and other noncompliant activity. 

However, two of the most common IRS penalties are related to late filing and

late payment of taxes. The penalties are:

• The failure to file penalty (FTF): 5% per month on the balance due, maximum of 25%.

• The failure to pay penalty (FTP): 0.5% per month of balance due, maximum of 25%.

Well did you know there could be some relief available from these types of

penalties. For the failure to file or pay penalty, taxpayers can request that the

IRS “abate” the penalties. Abatement is simply removing the penalties after

they are assessed to the taxpayer.

For the FTF and FTP penalties, the IRS has two primary reasons that it

abates these penalties:

• Reasonable Cause Relief (RC): Where the taxpayer can show that they used ordinary care and prudence, but they could not comply (file or pay on time) due to unforeseen circumstances outside of their control (“Reasonable Cause” excuse for noncompliance).

• IRS’s First-time Penalty Abatement Relief (FTA): Can be used to abate both the FTF and FTP penalties for a taxpayer in good standing (filed all returns, paid all taxes or in an IRS agreement on the balances owed) with clean compliance history (no penalties in past three years prior to the penalty year).

The first-time penalty abatement (FTA) waiver is an administrative waiver that

the IRS may grant to relieve taxpayers from failure-to-file, failure-to-pay and

failure-to-deposit penalties if certain criteria are met. The policy behind this

procedure is to reward taxpayers for having a clean compliance history.

everyone is entitled to one mistake.

The FTA is the easiest of all penalty relief options. You can request it by

calling the toll-free number on your IRS notice or in writing. A taxpayer may

claim an FTA for only a single tax period. To qualify, taxpayers must not have

been assessed any other penalties of a “significant amount” on the same type

of tax return within the past three years and must be in compliance with all

filing and payment requirements.

Reasonable Cause Relief is usually granted under the circumstances that

meets the IRS definition of “Reasonable Cause”, within the context of the

taxpayer failing to comply with their tax obligations and the granting of relief

because the taxpayer “exercised ordinary business care and prudence in

determining their tax obligations” Reasonable cause is defined within penalty

sections of the Internal Revenue Code as the evidence required by the

taxpayer that he or she “acted in good faith or that the taxpayer[’s] failure to

comply with the law was not due to willful neglect” (“Reasonable Cause”).

Reasonable cause relief request can also be requested by phone.

However, phone requests rarely work for reasonable cause abatements. Taxpayers can

complete Form 843: Claim for Refund and Request for Abatement, and attach

their rationale and evidence to support their reasonable cause claim. Note: the

IRS will take Form 843 or a letter from the taxpayer. Form 843 is preferable

because it contains the minimum requirements to identify a penalty abatement

request.

The important thing is to see if these options are available prior to paying the

penalty, it never hurts to ask. Because like my Aunt Myrtle use to tell me “A

close mouth does not get fed”.