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!

New Homebuyer Credit to Increase to $15,000?

Wow...as if enough people are not already fuming that since its revision, the new homebuyer credit no longer has to be repaid- Thousands of people took advantage of the $7,500 credit last year which has to be repaid over the next 15 years. You can imagine how enraged they became when earlier this year the credit was revised so that all 2009 homebuyers can receive the credit as basically FREE MONEY with no repayment (of course conditions do apply...be careful).

Now the senate is considering another revision. They've proposed increasing the maximum amount from $8,000 to $15,000! And the big news here- not only would the amount of the credit be increased, the proposed legislation would also expand the current tax credit so that it applies to any buyer of any home- not just first-time buyers.

The legislation would also eliminate the income caps under the current tax credit so that there would be no income limit for eligibility (currently it is $75,000 for an individual and $150,000 for a couple). The legislation would extend the tax credit for one year from the date of enactment, allowing homebuyers to claim the credit on their 2009 tax return for purchases made in 2010.

Republican Senator Johnny Isakson of Georgia has introduced the bill. You can read more about it by copying and pasting the following link.

http://www.webcpa.com/news/Senate-Proposes-Boosting-Homebuyer-Tax-Credit-50747-1.html?ET=webcpa:e323:130884a:&st=email

Are you considering bankruptcy as an option in dealing with your tax debt?

Many people consider bankruptcy as one possible way to deal with their debt. But will it help you deal with your tax liability?

Before filing for bankruptcy keep in mind how it will effect your credit. It will remain on your credit report for at least 7 years, usually 10, depending on the credit agency guidelines.

If you do choose to file, there are two main options for most individuals to consider.

Chapter 7 Bankruptcy is a liquidation of your assests, reducing everything to cash in order to make distributions to your creditors. In cases where the individual has no assets he or shes receives a discharge that releases him or her from certain dischargable debts. The discharge typically comes about 3 months from the date of filing the petition. The most important thing to know regarding your tax liability and Chapter 7 is that only tax debt prior to the past 3 years can be eliminated in your Chapter 7 filing. So, any tax liability assessed to you within the past 3 years will NOT be eliminated in Chapter 7 bankruptcy. Tax debt prior to the past 3 years may or may not be forgiven. The IRS does have the ability to reject the request. So in many cases, Chapter 7 is not a good solution to dealing with your tax debt. If you do choose to use it, you should hire a reputable attorney who will thoroughly work your case and seek to eliminate as much debt as possible, including tax debt prior to 3 years. Remember though, there is no guarantee the IRS will forgive any debt at all.

Chapter 13 Bankruptcy is an adjustment of debts for individuals with a regular income. It allows the debtor to maintain current assets and work out a payment plan to deal with their debt, typically taking 3 to 5 years to complete. The debtor must complete the payments required under the plan before the discharge can take place. A good bankruptcy attorney will work out a payment plan for you that allows you to make payments to the IRS during your bankruptcy.

Remember that penalties and interest on your tax debt continue to accrue throughout bankruptcy. A lein may also remain in effect through Chapter 13. Also, the statute of limitation- the 10 years that the IRS has to collect on you after the date of assessing your debt, is frozen during bankruptcy. So this period of time does not in any way help you "ride out" the amount of time the IRS has to collect on you. Though the IRS will not attempt to collect from you during bankruptcy, you will have to deal with the debt as well as the penalties and interest that have accrued, after your discharge.

See the government's website below for more information on bankruptcy. Contact me personally if you'd like to know more about how bankruptcy may or may not be able to assist you in dealing with your tax liability.

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics.html

Is an Offer in Compromise the right solution for your tax debt?

As a Tax Consultant, I'm proud to say that I work for a company that won the Torch Award from the Better Business Bureau for excellence in marketplace ethics. Effectur Inc is a different kind of tax resolution company- one that makes no wild promises to clients in order to earn their business but instead handles each situation with honesty and integrity.

Having said that, for my first post, I wanted to point out an article from the IRS that warns taxpayers to be very cautious of tax resolution companies that promise pennies on the dollar to settle their tax debt issues. This article can also be found on the IRS website. The link is provided below.

Check Carefully Before Applying for Offers in Compromise

IR-2004-17, Feb. 3, 2004

WASHINGTON — The Internal Revenue Service today issued a consumer alert advising taxpayers to beware of promoters’ claims that tax debts can be settled for “pennies on the dollar” through the Offer in Compromise Program.

Some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time. An Offer In Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances.

“This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements,” said IRS Commissioner Mark W. Everson. “We urge taxpayers not to be duped by high-priced promises.”
The OIC may be considered only after other payment options have been exhausted. If taxpayers are unable to pay their taxes in full, there are other payment options, such as monthly installment agreements, that must be explored before an OIC can be submitted.

The IRS.gov Web site contains complete information on the collection process and payment options. Publication 594, The IRS Collection Process, also provides helpful information on the options available to taxpayers. Taxpayers also should review Form 656, Offer In Compromise, or Form 9465, Installment Agreement Request, to determine if they qualify for either payment program. Form 656 provides detailed instructions for submitting an offer and includes all of the necessary financial forms.

Some taxpayers may be exempt from the $150 OIC fee depending on income or whether the OIC is based solely on doubt as to tax liability. Taxpayers who claim the poverty guideline exception must certify their eligibility using Form 656-A, Income Certification for Offer in Compromise Application Fee. The poverty guideline exception applies only to individuals.

http://www.irs.gov/newsroom/article/0,,id=120169,00.html

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