Receiving any kind of mail from the IRS—with the exception of your long-awaited tax refund—can be a nerve-wracking experience, especially when Uncle Sam comes bearing bad news. Maybe you didn’t file your taxes on time, or maybe you have an outstanding tax bill that needs immediate payment—either way, the IRS has hunted you down and pinned a nasty penalty on your account.
If you’re like most people faced with an IRS penalty, something likely came up that prevented you from fulfilling your tax duties. Fortunately, the IRS offers taxpayers an opportunity to challenge penalties and seek relief. Using this guide, we’ll walk you through the types of common IRS penalties, how to appeal IRS penalties, and how to get IRS penalties waived.
- What Types of Penalties are Eligible for Relief?
- What are the Different Types of Tax Penalty Relief?
- How to Get IRS Penalties Waived or Appealed
What Types of IRS Penalties are Eligible for Relief?
There are nearly 150 penalties listed in the Internal Revenue Code, however, 74% of all penalties issued annually trickle down into three dominant penalty types: failure to file, failure to pay, and failure to deposit. Each of these three common penalties are also eligible for relief. Let’s take a more detailed look at what these penalties are and how much they’ll cost you.
Failure to File
Taxpayers who neglected to file their taxes on time or file taxes altogether are subject to the Failure to File penalty. The IRS is authorized to assess and distribute Failure to File penalties anytime beyond the date your taxes are due, and the sum of the penalty is either tacked onto your total outstanding tax bill or subtracted from the refund the IRS owes you.
The current Failure to File penalty is 5% (4.5% late filing fee and 0.5% late payment) of the unpaid tax for each month that your return is late. This penalty maxes out at 25% but will continue to accrue until the balance is paid. In the event that you file more than 60 days after the deadline, the minimum penalty is either 100% of your outstanding tax balance or a specific dollar amount that is adjusted annually for inflation—whichever is the lesser.
The specific dollar amounts are as follows:
- $435 for returns due on or after 1/1/2020*
- $210 for returns due between 1/1/2018 and 12/31/2019
- $205 for returns due between 1/1/2016 and 12/31/2017
- $135 for returns due between 1/1/2009 and 12/31/2015
- $100 for returns due before 1/1/2009
If you are unable to file your taxes by Tax Day, there are measures you can take to avoid facing the dreaded wrath of the IRS. Requesting a tax-filing extension can save you the headache and financial burden of a Failure to File penalty by giving you an extra six months to collect your documents, prepare your taxes, and submit to the IRS.
It’s important to note that while an extension gives you extra time to file, you will still be expected to pay your taxes by Tax Day. Neglecting to do so will result in a Failure to Pay penalty.
Failure to Pay
The Failure to Pay penalty is charged to those who do not pay their taxes on time, in full, or at all. The current Failure to Pay penalty ranges between 0.25% to 1% of the unpaid tax amount depending on your particular circumstances. Here’s how the IRS breaks it down:
- The 0.25% penalty applies to individual tax filers who have elected to repay their debts through an installment agreement.
- The standard penalty is 0.5%
- The 1% penalty applies to individual filers who have not paid their outstanding balance within 10 days of a notice of intent to levy.
Each of these penalties is imposed on each month that the tax goes unpaid but maxes out at 25% of the total tax you owe.
Failure to Deposit
The IRS sends all businesses with employees a letter detailing their federal tax deposit schedule to ensure each business is made aware of their federal taxpaying responsibilities. Employers are required to withhold specified amounts from their employee’s paychecks in order to cover federal income, Social Security, and Medicare taxes, and the sum of the money withheld must be deposited on the aforementioned IRS-distributed schedule. If you neglect to deposit by the designated deadline, the IRS will impose a Failure to Deposit penalty.
This penalty also applies if the amount paid is incorrect or if the deposit is filed in an incorrect manner. It is up to the business to assess the value of their combined employee’s withholding, adhere to their deposit schedule, and transfer the funds electronically to the IRS.
Failure to Deposit rates are as follows:
- 2% for 1-5 days late
- 5% for 6-15 days late
- 10% for 15 days or more late
- 10% for deposits not made electronically
What are the Different Types of Tax Penalty Relief?
There are three categories of penalty relief offered by the IRS; reasonable cause, penalty abatement, and statutory exception. Depending on your particular situation, you may qualify for a reduction or total elimination of penalty fees under valid circumstances.
How to Get IRS Penalties Waived or Appealed
To dispute IRS penalties, you’ll first need to understand which type of penalty relief applies best to your case. Use the guide below to help steer you in the right direction.
Reasonable cause is embodied by circumstances out of your control that prevented you from taking care of your taxes in a timely fashion. While forgetfulness will not hold up in the eyes of the IRS, there are a number of other legitimate occurrences that would qualify for reasonable cause, including:
- Fire, natural disaster, casualty, or other serious disturbances count as reasonable cause.
- Inability to obtain pertinent records
- Death, serious illness, incapacitation of the taxpayer or an immediate family member (related to the tax file)
How to Apply for Reasonable Cause Relief
If you believe you qualify for penalty relief due to reasonable cause, you must provide enough supporting documentation to defend your request. Additionally, when piecing together your request, be sure to only include relevant information that keenly details the reasons why the event was unforeseeable and how you took reasonable steps to comply to the best of your ability.
You may even consider seeking legal representation to ensure your request is properly structured and contains all of the necessary documentation for approval.
IRS penalty abatement is an administrative waiver designed to grant taxpayers relief from Failure to File, Failure to Pay, and Failure to Deposit penalties if specific criteria are met. Taxpayers who have a clean taxpaying history aside from may qualify for first-time penalty abatement (FTA) so long as this is their first issuance of a Failure to File, Failure to Pay, or Failure to Deposit penalty. In the eyes of the IRS, everyone is entitled to one mistake, and first-time penalty abatement accommodates it.
The first-time penalty abatement applies if the following are true of your situation:
- You weren’t previously required to file a return or have no charged penalties for three tax years prior to the tax year in which you received the penalty.
- You have filed all required forms or filed an extension of time to file.
- You have paid, or arranged to pay, any outstanding tax balance.
How to Apply for Penalty Abatement Relief
To request penalty abatement, you can call the toll-free number on your IRS notice or send a written request directly to the IRS. If you have a tax professional on retainer, they can call the dedicated tax pro hotline or compliance unit to request an FTA for you.
Should you decide to go the written request route, be sure to provide other persuasive penalty relief arguments, including reasonable cause, to increase your chances of approval and success. If you opt for a phone call request, be sure to make note of the IRS agent’s name, number, and instructions.
If you received incorrect written advice from the IRS that resulted in a penalty, you might qualify for statutory exception relief. You will need to present supporting documentation to defend your case, including the following paperwork:
- Your written request for advice.
- The incorrect or misleading advice you relied on provided by the IRS.
- The report of tax modifications identifying the penalty or addition to your tax and any relevant items relating to the erroneous advice.
How to Apply for Statutory Exception Relief
To dispute an IRS penalty due to statutory exceptions, you will need to file Form 843: Claim for Refund and Request for Abatement. You can call the toll-free number listed on your IRS notice to speak with an agent
A penalty from the IRS is far from the end of the world—with a little bit of research, a phone call, or a written letter, you can appeal your IRS penalties with ease. Whether you need advice on how to get IRS penalties waived, assistance with tax abatement, or anything else in between, you can count on Community Tax for all of your tax resolution needs.