If you owe the IRS money for delinquent income taxes, penalties and interest begin to accrue after April 15. Penalties start to accumulate on April 15, not the day you order the delay, even if you demand an extension. You can only stop your tax debt from growing once you make your payment in full.
The good news is that you may take multiple steps to decrease IRS penalties and interest. The IRS may also reduce the amount they anticipate you will have to pay back if you qualify for penalty abatement.
Individual taxpayers may be subject to specific, significant penalties from the IRS. This article will discuss how interest is applied to tax debts. Additionally, we’ll talk about how we can get your outstanding taxes, interests, and penalties reduced or even eliminated.
IRS Penalties and Interests
If your annual revenue tax return has an outstanding balance, penalties begin to accrue the day before taxes are raised. As a result, in most cases, penalties are assessed immediately on April 15, and interest starts to accrue by that date. In general, the only way to keep your tax bill from spiraling out of control beyond the deadline is to pay off any amount you owe in full on that date.
The two most frequent IRS fines are the failure-to-file and failure-to-pay fines.
- Failure-to-File Penalty
A deduction of 5% of the unpaid taxes is made for every full or partial month that a tax liability is overdue. The fine cannot be greater than 25% of your due taxes.
- Failure-to-Pay Penalty
A 0.5% late payment penalty is applied to the overall amount payable for each or part of the month the tax is past due. Your back taxes plus a 25% sentence limit.
The IRS will never impose penalties on your past-due tax bill exceeding the maximum of 25%. However, fines might quickly reach the 25% threshold if you wait several months to file.
For instance, there is an immediate $2,500 penalty if your debt is $10,000. You will not be charged this fine if you request an extension during the additional six-month filing window that is available to you as long as you do so before the deadline.
In many cases, interest charges lead the IRS debt for a taxpayer to rise rapidly. The interest rate on tax liability is calculated by adding 3% to the current federal funds rate. Assuming a 2% federal funds rate, the interest rate on tax debt is 5%.
Interest on tax debt is compounded daily. In other words, the IRS will continue to levy interest on your debt until it is fully paid off.
What is IRS’ Penalty Abatement?
Your tax debt might be decreased through penalty abatement. It is an application for exemption from IRS fines and interests when the taxpayer cannot make payments. If you cannot pay your obligations in full due to financial difficulties, such as unemployment or medical expenditures, the IRS may be able to waive or decrease penalties.
The IRS offers three primary options for penalty abatement:
- First-Time Penalty Abatement
You might be eligible for this aid, which ensures the safety of some of the most common IRS penalties, provided you haven’t obtained a sizable penalty in the last three years.
- Reasonable Cause
If you have made all necessary efforts to file and pay your tax obligations but have been unable to do so due to unusual circumstances, you are typically qualified for this waiver.
Following are a few examples of recognized good causes accepted by the IRS:
- Civil unrest, natural disasters, or fires
- Difficulty obtaining tax documents
- The unavoidable absence of the taxpayer or a member of their immediate family; death; or a severe illness
- A timely electronic submission or payment that is postponed due to system errors
- Statutory Exception
Usually, you qualify for this reduction when the IRS gives you bad advice, and you end up paying an unnecessary fine.
Who Qualifies for Penalty Reduction?
If you owe money to the IRS, they will negotiate with you, but only in particular situations. Find out what kind of penalty abatement you are eligible for before calling the IRS for help.
- For First-Time Penalty Abatement
If you meet the following criteria, you may be eligible for a first-time penalty reduction:
- Filed the same return type for the three tax years before the tax year for which the penalty was charged, if necessary.
- Had no penalties imposed in the three years prior or had any penalties overturned for a justifiable reason other than a first-time abate.
- Submitted all required returns on time or asked for a lawful extension;
- Already paid or have the plan to make a legal payment
- For Reasonable Cause
You might be eligible for reasonable cause relief if the first-time penalty reduction is unavailable. To be eligible, you must:
- You have been charged a fee for failing to pay your taxes, deposit, or tax return.
- Despite your efforts, you could not gain access to the documents that might impact your tax return.
- You have encountered the IRS-provided accepted legitimate causes.
- For Statutory Exception
Navigating the tax system can be difficult, and poor IRS counsel can worsen the situation. If you believe the IRS misled you and you, as a result, were fined, you must provide the following proof:
- A copy of your message requesting guidance.
- A duplicate of the IRS’s misguided instruction.
- Any publications relating to incorrect advice, tax adjustments, and penalty.
To request a reduction and a refund, fill out Form 843 rather than call the IRS. Be ready to provide copies of the evidence that supports your argument.
How to Appeal a Decision on Penalty Abatement
Getting a rejection letter from the IRS can be frustrating if you believe you are eligible for penalty abatement.
Examine the guidelines provided in the IRS letter of your penalty before submitting an appeal. Check to see sure all the information is correct. If you can resolve the sentence over the phone because it was based on inaccurate information, contact the toll-free number provided on your notification.
To submit an appeal, all of the following prerequisites must be fulfilled:
- The IRS sent you a letter alerting you that you were assessed a penalty for failing to file your return or to pay your taxes on time.
- In a letter you sent to the IRS, you demanded that they waive this fine.
- The IRS denied your request for a penalty reduction.
- You were granted a Notice of Disallowance, which allows you to appeal.
You have 30 days to initiate an appeal after receiving that your request for a reduction in charges has been rejected.
Penalty Abatement – Your Best Chance for Tax Relief
In conclusion, the penalty abatement process may initially seem confusing and intimidating. However, it is a very straightforward process that allows you to get back on track with your taxes.
There are numerous cases where a taxpayer may qualify for a penalty reduction. Whether your situation satisfies this standard will depend on the particulars of your case and the relevant legal provisions. Before attempting to file an abatement request on your behalf, you should consult a tax specialist, such as our certified tax experts, as the law governing penalty abatement is rather complex.
Act fast and call us for a FREE tax case evaluation!