Tuesday, June 16, 2009

What About Penalty Abatement?

Many of my clients are willing to pay what they owe the IRS, but they are not at all happy about having to pay the additional penalties assessed to them by the IRS. As a result, there are numerous questions regarding penalties and of course the question of whether or not those penalties can be abated (cancelled).

Here is some very important information from the IRS on penalties:

First, any taxpayer who does not file their return and pay their tax by the due date may have to pay a penalty. There are two main types of penalties assessed to the taxpayer- failure-to-file and failure-to-pay penalties.

The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month that the return is late. This penalty will not exceed 25 percent of the taxpayer’s unpaid taxes.

If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

You will not have to pay a failure-to-file penalty if you can show that you failed to file on time because of reasonable cause and not because of willful neglect.

You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.

If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty.

If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

So, your next question might be- "Can I qualify for a penalty abatement?" "What is reasonable cause?"

Generally reasonable cause criteria for failure to file and failure to pay penalties are one or more of the following. Keep in mind that you'll need documentation to prove all of the items including a detailed chronology of events that backs up your reasons for non-compliance.

Here is the criteria which may allow you to have penalties abated...

1. A medical condition (includes addictions) that does not allow you to file/pay your taxes (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work, ability to obtain professional advice, etc.) Documentation needed includes medical notes from physicians, medical bills, other financial bills/bankruptcy, disability claims (SSA), lack of income, lack of employment, etc.

2. A reliance on a tax professional or other professional for your tax preparation, tax deposits, and tax filings. Documentation includes: Engagement Agreement with the professional, lawsuits filed against the professional, if the professional was an employee- documentation on the dismissal of the employee and analysis of reasons for dismissal that relate to tax non-compliance, etc.

3. An Act of God occurred that caused a hardship that did not allow the client to comply: e.g. Fire, flood, hurricane, tornado, etc. (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work) Documentation includes:evidence of the disaster, insurance claims, description of property/records lost, etc.

4. Loss or theft of records that were outside of the client’s control, e.g. papers destroyed by employee, etc. Documentation includes police reports, employee dismissal documentation, etc.

5. You were a victim of a crime, e.g. embezzlement. Documentation includes police reports, insurance claims, etc.


At Effectur, we as Tax Professionals are very cautious before we try to negotiate a Penalty Abatement for a client. If you think you're a candidate, contact me today and we'll talk about it!

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