Types of IRS Penalties and Interest

The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion.

If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.

Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes.

There are a multitude of penalties the IRS can assess. The more common penalties are:

  • Estimated tax penalty
  • Failure to file penalty
  • Failure to pay penalty
  • Accuracy related penalty
  • Substantial underpayment penalty
  • Negligence
  • Civil Fraud
  • Frivolous tax
  • Bounced checks

The IRS collects billions of dollars in the assessment of penalties and interest. The penalties are unforgiving and extremely harsh!

How to Reduce or Eliminate IRS Penalties and Interest

Fortunately, there are several relief provisions that can help eliminate or otherwise reduce penalties that have been assessed.

Unfortunately, these provisions are not automatic and the relevant standards are often difficult to meet. That being said, you can obtain relief where you can demonstrate that it would be unfair to assert additional amounts because certain underlying circumstances had or currently exist.

The criteria for penalties to be abated is the “reasonable cause” standard. This standard states that despite the fact the taxpayer exercised business care and prudence, that something unforeseen occurred, and that in turn, caused the conditions in which the penalties were assessed.

The abatement of penalties is considered on a case-by-case basis. Unfortunately, with few exceptions, there are generally no predefined standards that can be applied. However, there does exist listings of prior penalty abatement requests that will generally be rejected. For this and similar reasons, it is strongly recommended that you employ the services of a knowledgeable tax consultant in the consideration of your individual circumstances.

The passage of time since the underlying event which caused the delay and the payment of taxes is paramount. Generally, the smaller the window of time between these events, the greater are you chances of success.

After you have determined that your application for abatement given your individual circumstances appears reasonable and your probabilities for success are good, it is a matter of drafting an appropriate letter or completing an application for consideration and mailing it. There is no requirement that you pay the penalties prior to your abatement request.

Six Main Reasons the IRS will Abate Penalties

There are six main reasons the IRS will abate penalties:

  • Death or serious illness of the taxpayer or family member
  • Unavoidable absence
  • Destruction by fire or other casualty of taxpayer’s business or business records
  • Inability to determine taxes due for reasons beyond the taxpayer’s control
  • Taxpayers ability to make deposits or pay taxes has been materially impaired by civil disturbances
  • Taxpayer lacks the funds to deposit or pay taxes despite the exercise of ordinary business care and prudence

How We Can Help You

Call us today for help to solve your IRS penalty problems. We can help you to determine what your penalties may be and provide knowledgeable, professional assistance in helping you to reduce your taxes owed, penalties and interest.